Contributing to an HSA
Members receive a tax advantage from their HSA whether or not contributions are made through payroll deduction or independently.
Pre-tax contributions (through payroll deduction)
A pre-tax contribution means the contribution amount is automatically taken from the member's paycheck via payroll deduction before income taxes are taken out. You, the employer, must amend your Cafeteria Plan (Section 125 plan) to include HSA contributions. Contact your Cafeteria Plan administrator to make this change.
Members can make their own contributions to an HSA using after-tax dollars if the employer doesn't offer pre-tax deduction or if they would like to make a contribution over and above their weekly automatic deduction. Members who make their own contributions can take an "above-the-line deduction" when calculating their income taxes. This provides the same advantage as a pre-tax deduction.
Contribution maximums - Jan. 1 effective date
HSAs have a yearly contribution maximum, as set by the federal government. For 2013, the contribution maximums are $3,250 per single and $6,450 per family. For 2014, the contribution maximums are $3,350 per single and $6,550 per family. If an employee is not eligible for an HSA the entire calendar year, they may need to pro-rate their contributions.
Contribution maximums - mid-year effective date
Groups who have an effective date other than Jan. 1 must calculate maximum contributions a little differently. Here's how:
- HSA participants must meet the "testing period" requirement, which states that a member who is eligible on Dec. 1 of the current year and the entire following calendar year may contribute the established maximum contribution.
Example: A member who becomes eligible on Aug. 1, 2012 may make the maximum contribution for 2012 if they are sill eligible on Dec. 1, 2012 and remain eligible Jan. 1, 2013 through Dec. 31, 2013.
- If a member doesn't meet the testing period requirement, they will need to pro-rate their contributions using this calculation: maximum contribution / 12 x number of months eligible = allowable contribution.
Example: A member who becomes eligible on Aug. 1, 2013, but loses eligibility on Nov. 1, 2013 would calculate their maximum contribution like this: $3,250 (2013 maximum contribution for singles) / 12 x 3 (months eligible) = $810.
Note: If a member doesn't meet the testing period requirement and contributes more than their allowable contribution, they must take a 6% penalty when they file annual taxes.
When a spouse holds the HSA
- The HSA account holder doesn't have to be the subscriber. The account can be in the spouse's name if the spouse meets the eligibility criteria.
- If your company contributes to an HSA held by an employee's spouse, the contribution is taxable as gross income to the employee.
- A spouse is required to have their own HSA in order to make catch-up contributions. An employee's and spouse's catch-up contributions cannot be made into the same account.
The member (account holder) is not the only one who can contribute money into their account. Family members and friends can also contribute as long as the member meets the eligibility requirements. It's the account holder, not the friend contributing, who enjoys the tax savings.
Types of employer contributions
Employers can contribute money into employees' HSAs using one of these three methods:
- Lump sum contributions - Contributing a lump sum at the beginning of the year helps employees pay for expensive claims incurred early in the year. The drawback is the contribution immediately belongs to the employee and can't be retrieved if the employee leaves the company.
- Pro-rated contributions - Contributions can be made quarterly, monthly, each pay period, etc. This could save you money, but would mean an employee with an expensive claim at the beginning of the contract year would have to pay high out-of-pocket costs.
- Accelerated contributions - The IRS allows employers making pro-rated contributions to accelerate contributions to employees who experience high medical claims early in the year. With this option, you would have to set a corporate policy for accelerated contributions and implement the policy equally to all employees. You can set the rules, such as allowing accelerated contributions for medical claims only (not vision, dental, etc.) or for claims over $1,000.
Example: You contribute $100 per month to each employee's HSA. With accelerated contribution, if an employee incurs a claim for $1,000 early in the plan year, you can choose to give them their entire contribution ($1,200) at that time.
All contributions you make to your employees' HSAs must be comparable, and you can set the rules.
- Contributions must be the same amount or calculated as the same percentage of the deductible for all employees during the same period of time.
- You can apply the rules separately to full-time, part-time and former employees.
- You can have separate contributions amounts for single, double, family, etc.
Comparability rules don't apply to HSA contributions made through cafeteria plans (Section 125 plans). A separate set of discrimination rules apply for these plans.