Employer Contributions to Employee HSA Accounts

Health Savings Accounts, or HSAs, are popular savings tools for healthcare and retirement expenses. Eligibility is tied to enrollment in qualified high-deductible health plans (HDHPs), but anyone may contribute funds, including employers. As they seek more ways to attract and retain valuable talent, what should employers know about HSA contributions?

Contribution Amount

Each year, the IRS sets contribution limits for HSA participants, and exceeding that limit can have tax consequences. If an employer intends to make contributions to employee HSA accounts, communicate the plan in advance. This can help the employee identify the possibility of excess contributions before it happens.

Based on Employee Status

Another consideration when determining an amount is an employee's status. Here are some examples:

  • Flat-rate contribution for all active HSA participants, regardless of the employee's health coverage level (self-only vs. family) or other factors
  • Flat-rate contribution based on employee's health coverage level (e.g., a higher contribution for family coverage than for self-only)

In the process, employers must be careful not to make contributions that are discriminatory or disproportionately beneficial for higher-salaried employees.

Based on Matching

Just as many do with 401(k) retirement plans, employers can make contributions to HSAs based on a matching formula tied to each employee's own contributions. While 401(k) contributions only assist in retirement, HSA contributions can assist employees with healthcare expenses both now and later and with any type of expense once they reach retirement.

Contribution Timing

Employers decide the frequency of their contributions, which can range from each payday to annually. Timing can be influenced by a variety of factors, such as:

  • Non-calendar plan year – Not all health plans start on January 1, and employees may change their contribution amounts often, possibly making it more difficult to avoid causing an employee account to exceed the annual limit.
  • Tenure – Some employers who make annual contributions may decide to make the deposit closer to the calendar year's end to avoid providing a full year's contribution to an employee who winds up leaving mid-year.
  • Cash flow – Employers with low turnover and tenured employees may be comfortable depositing an annual contribution at the beginning of the plan year. This is beneficial for employees with significant medical expenses since HSA spending cannot exceed the available account balance.

Contribution Tax Considerations

HSAs offer participants "triple tax savings," including pre-tax income contributions, tax-free accumulation of interest and dividends, and tax-free distribution for eligible expenses.

But participants aren't the only ones who benefit from payroll-deducted contributions. When employees make pre-tax contributions, their taxable income decreases, resulting in lowered employer payroll tax matching liability. Employer matching contributions also typically qualify as a business expense.

Contribution Eligibility

Not all high-deductible health plans meet minimum HSA requirements, which include deductibles of at least $1,600 for self-only and $3,200 for family coverage in 2024, among certain other requirements. If the HDHP does not meet HSA requirements, the employee can enroll in a Flexible Spending Account instead.

There are also requirements for switching from an FSA in one plan year to an HSA in the next, and vice-versa. For more information, see "Switching Between an FSA and HSA."

Finally, once an HSA owner enrolls in Medicare, they are no longer eligible to make HSA contributions or receive HSA contributions from their employer. They can, however, continue to spend down their HSA account balance.

Final Thoughts

According to The Commonwealth Fund, American spending on healthcare is far higher both per capita and as a share of GDP than other high-income countries. Health Savings Accounts are a great way for qualified employees to offset some of those costs. At the same time, contributing to employee HSA accounts can be an effective way for employers to attract and retain their most valuable assets – their employees.

Contact DataPath Administrative Services, your broker, or qualified benefits counsel with questions.

DataPath Administrative Services has provided third-party administration and compliance services to Arkansas employers since 1996. Please enter your email to receive notifications about new blog articles (above right).