As health savings accounts grow in popularity, this is an opportunity for brokers. Employers are wondering if they should take the leap and offer them to their employees.
They’ve heard of the tax advantages, and perhaps know about HSAs’ portability factor, but beyond that they might not even know what questions to ask.
The benefits broker they’ve already established a relationship with is in a prime position to help them.
A great benefits broker not only understands HSAs (and HDHPs), he or she can anticipate what employers new to HSAs might want to consider in their decision-making.
Here are 5 HSA questions and answers to use in helping employers who might want to know basic, bottom-line information to begin considering whether to offer them or not.
1. What are the advantages to an employer of offering an HDHP and HSA combination?
The benefits of offering employees an HDHP and HSA vary dramatically depending upon the circumstances. A major strength of offering an HSA program is flexibility.
Employers can be very generous and fully fund an HSA and also pay for the HDHP coverage.
Alternatively, employers can also use the flexibility of the HSA to allow for the employer to reduce its involvement in benefits and put more responsibility onto the employee. Generally, employers switch to HDHPs and HSAs to save money on the health insurance premiums (or to reduce the rate of increase) and to embrace the concept of consumer driven healthcare.
The list below elaborates on strengths of HDHPs and HSAs.
• Lower Premiums. HDHPs, with their high deductibles, are usually less expensive than traditional insurance.
• Consumer-Driven Healthcare. Many employers believe in the concept of consumer-driven healthcare. If an employer makes employees responsible for the relatively high deductible, the employees may be more careful and inquisitive into their health care purchases. Combining this with an HSA where employees can keep unused money increases employees’ desire to use health care dollars as if they were their own money – because it is their own money.
• Lower Administration Burden. Given the individual account nature of HSAs, much of the administrative burden for HSAs is switched from the employer (or paid third-party administrator) to the employee and the HSA custodian as compared to health FSAs and HRAs. This increased burden on the employee comes with significant perks: more control over how and when the money is spent, increased privacy, and better ability to add money to the HSA outside of the employer.
• Tax Deductibility at Employee Level. The ability of employees to make their own HSA contributions directly and still get a tax deduction is advantageous. Although it is better for employees to contribute through an employer, an employee can make contributions directly. An employer may not offer pretax payroll deferral or it may be too late for an employee to defer. For example, an employee that decides to maximize his prior year HSA contribution in April as he is filing his taxes can still do so by making an HSA contribution directly with the HSA custodian.
• HSA Eligibility. Becoming eligible for an HSA is a benefit that also stands on its own. Although not all employees will embrace HSAs, savvy employees that understand the benefits of HSAs will value a program that enables them to have an HSA.
2. What are employer responsibilities regarding employee HSAs?
If an employer offers pretax employer contributions, then the employer has the following responsibilities.
• Make Comparable Contributions. If the employer is making a pretax employer contribution (nonpayroll deferral), it must do so on a comparable basis.
• Maintain Section 125 Plan for Payroll Deferral. If the employer allows pretax payroll deferral, then the employer must adopt and maintain a Section 125 plan that provides for HSA deferrals. This includes collecting employee deferral elections, sending the deferred amount directly to the HSA custodian, and accounting for the money for tax-reporting purposes.
• HSA Eligibility and Contribution Limits. Employers should work with employees to determine eligibility for an HSA and the employee’s HSA contribution limit. Although it is legally the employee’s responsibility to determine his or her eligibility and contribution limit, a mistake in these areas generally involves work by both the employer and the employee to correct. Mistakes are best avoided by upfront communication. Also, the employer does have some responsibility not to exceed the known federal limits. An employer may not know if a particular employee is ineligible for an HSA due to other health coverage but an employer is expected to know the current HSA limits for the year and not exceed those limits.
• Tax Reporting. The employer needs to properly complete employees’ W-2 forms and its own tax-filing regarding HSAs (HSA employer contributions are generally deductible as a benefit under IRC Section 106).
• Business Owner Rules. Business owners generally are not treated as employees and employers need to review HSA contributions for business owners for proper tax reporting.
• Detailed Rules. There are various detailed rules that fall within the responsibility of the employer that are too numerous to list here but include items such as: (1) holding employer contributions for an employee that fails to open an HSA, (2) not being able to “recoup” money mistakenly made to an employee’s HSA, (3) actually making employer HSA contributions into employees HSAs on a timely basis, and (4) other detailed rules.
3. How do employers switching from traditional insurance to HDHPs explain the change to employees?
Although there is no certain answer to this question, a straight-forward and honest approach to the change will likely work best. Changing from traditional insurance to a high deductible plan with an HSA can be significant because employees likely face a higher deductible (although traditional health plan deductibles have been increasing to the point they are close to HDHPs).
Often the largest obstacle to the change is that employees feel something is being taken away from them. An employer that can show that the actual dollars contributed by the employer are level, or increased, versus the previous year helps a lot – especially if the employer makes a substantial HSA contribution for employees.
If the employer is making the change to reduce its health care expenses then the employer will have to explain and justify that change to employees to get employees’ support for the change (e.g., the business is in a tough spot due to a difficult economy, etc.).
Depending on the facts, the change will likely be an improvement for some employees and HSA eligibility provides benefits to all employees. Some specific benefits include the following.
• Saving Money. The HDHP is generally significantly less expensive. Depending upon the circumstances, this fact often saves not only the employer money but also the employee. Highlighting the savings will help convince employees the change is positive. Although an actual reduction of the employee’s portion of the premium expense may be unlikely given increasing health insurance premiums, explaining that without the change the employee’s portion of the premium would have increased by more will help reduce tension.
• Tax Savings. The HSA enables tax savings. For some employees these tax savings are significant.
• Control. HSAs give individuals control over their money and accordingly their doctor and treatment choices.
• Flexibility. An HSA is very flexible and allows for some employees to put aside a large amount and get a large tax benefit. For those that prefer not to do so, the HSA allows that as well. Plus, even better, the HSA allows employees to change their mind mid-year. If an employee believes they are not going to need any medical services, the employee needs to contribute only a minimum deposit to an HSA. If it turns out that the employee does incur some medical treatment, the employee can contribute at that time and still get the tax benefits. Employees are often frustrated by HSA rules because of some confusion, but when explained that the rules are very flexible they appreciate HSAs more.
• Distribution Reasons. HSAs allow for more distribution reasons than FSAs: namely to pay for health insurance premiums if unemployed and receiving COBRA, to pay for some health insurance premiums after age sixty-five, to use for any purpose penalty-free after age sixty-five, to carry forward a large balance, and more.
4. Do special HSA laws apply if an employer offers employees “HSA” qualified health insurance (HDHPs)?
Many insurance companies sell health insurance with the term “HSA” in the policy description. Although insurance companies do this to promote the fact that the plan is an HDHP necessary to qualify for an HSA, the description can cause confusion for employers and employees.
Health insurance and HSAs are two different products. Employers that offer HDHPs to employees or health insurance with term “HSA” in the title or description are not automatically subject to any additional laws regarding HSAs.
The HDHP product is insurance and HSA laws only apply when an employer is involved in the HSA plan as well as the insurance.
Employers offering insurance to employees are subject to a whole host of federal and state laws, the most significant being the Affordable Care Act.
If an employer that offers HDHP insurance decides to also make a pretax HSA employer contribution or allow for employees to made pretax payroll deferral HSA contributions then special HSA rules apply.
5. What unique HSA rules apply to partnership members, Limited Liability Corporation (LLC) shareholders, S-Corp shareholders and sole proprietors?
Business owners face special HSA rules that limit the owners’ ability to get tax benefits through the business. A business can usually deduct HSA contributions for employees as a business expense (IRC Section 106) and the HSA contributions do not get reported as income to the employees.
The rules are different for owners (other than employees that are also shareholders of C-corporations). The IRS reporting is different and so is how the HSA deduction is claimed. Some business owners are surprised by the different tax treatment of owners versus employees.
These special rules apply to business owners with entity structures other than C-corporations (or just “corporations – the “C” is added to clarify that it’s not an “Subchapter S” corporation or other type of corporation).
The special rules apply to partners in a partnership, members or partners in Limited Liability Corporations (LLCs), more than 2 percent owners of S-corporations, and sole proprietors. Business entity structure can vary state-by-state but these represent general categories for most businesses.
Beyond just the reporting differences, the key distinction between the treatment of owners versus employees is payroll taxes. Employer pretax HSA contributions avoid payroll taxes.
Employer contributions to business owners do not automatically avoid payroll taxes as it depends on how the distribution from the business is taxed (e.g., if it is capital gains, payroll taxes do not apply; if income, payroll taxes may apply).