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Tips for Selecting an HSA Health Plan for Your Business

Steps to identifying and choosing a high-deductible health plan include:

  1. Know the qualification rules for a high-deductible health plan.

  2. Ask others (insurance agent, colleagues, associations, etc.) for recommendations and referrals to brokers and health insurance providers.

  3. Be aware that health insurance regulations vary by state; find out your state’s regulations.

  4. Checkout the insurance provider and broker for service quality and licensing.

  5. Consider using a smaller firm, where your business will make a difference to their business.

  6. Have insurance data of current health plan available (total cost, employee data such as health, age, gender, residency).

  7. Consider the cost of a plan as an individual or group (a “pool” of individuals/businesses).

  8. Call vendors and ask if they offer any HSA-qualified high-deductible coverage plans; mention you are reviewing health insurance providers, and would like to see what they can present. Also, explore and use online insurance brokers.

  9. Fill out the insurance application form completely and accurately, noting pre-existing conditions, age, gender, and residency.

  10. Use at least three vendors and get at least three competitive bids for high-deductible policies. It is important to get each bid broken down into inclusions and exclusions, for comparison.

Note: HSAs cannot be initiated unless a high-deductible health plan is already is place.

Additional Considerations

Know qualification rules for a high-deductible health plan:
Deductible minimums of $1,050 for an individual, or $2,100 for a family plan.

Out-of-pocket maximums not to exceed $5,250 for individuals, or $10,500 for families.

No co-pays allowed (no "first dollar" coverage) until after the minimum deductible amount has been met (no “first dollar” coverage at all after Jan.1, 2006).

Checkout agents for licensing and certification, they should have a professional designation, such as Registered Health Underwriter (RHU) or Registered Employee Benefits Consultant (REBC), or hold membership in the National Association of Health Insurance Agents (AHIA) or National Association of Insurance and Financial Advisors (NAIFA).

To know with whom you are dealing, use rating services, such as A.M. Best (www.ambest.com) and NCQA (www.ncqa.org) that monitor customer satisfaction with insurance providers. Check with state licensing agencies for proof of a broker’s/agent’s current license.

Cost of health insurance is often higher for smaller businesses. Consider joining a “pool’ with others to lower costs. Trade associations, local business groups, state and local governments may offer you the chance to join a "pool” with others. Check to insure this is advantageous for your business.

Fill out the insurance application form completely and accurately, if any applications are incomplete or inaccurate, the company may either refuse to pay your claims or cancel your policy.

Get the details, ask insurance providers to provide you with:

  • Premium schedule (dates premium payments are due)

  • Benefits schedule (detailed list of what is or is not covered)

  • Premium rates and ALL applicable administrative fees (monthly and setup fees)

  • Copy of a sample agreement and application form (to review before you sign up)

  • Checkable references from other clients with similar needs

Be aware of the most overlooked aspect when selecting a company health plan Guarantee of Renewal. This means that the insurer will not be able to, at a whim, cancel your policy, as long as you continue to pay the premiums on time. If possible, also get a cap on percentage increases over the first three years. Get this in writing.

Other considerations:

Before you sign on the dotted line…READ the policy. Have someone else look at it. Make sure you're getting what you asked for.

Key Financial Considerations for Any Policy Plan

  1. Cost of premium(s) on monthly basis for the year.

  2. Amount of deductible for year.

  3. Maximum Lifetime Benefit amount for life of the policyholder.

  4. Exclusion of preventative care from deductible amounts.

  5. Discounts for use of in-network services or doctors.

  6. Additional costs for desirable options (i.e. maternity, prescription drug benefits).

  7. Guaranteed of renewal.

  8. Reasonable assurance of insurer's financial stability and ability to pay claims.

  9. Insurer's reputation for good customer service and rapid response to questions when they arise.

Good rules of thumb to keep in mind when choosing a vendor:

  • Companies with good reputations generally earn them and try to keep that reputation.

  • Capping expenses for the next three years is more important than the cheapest rate this year.

  • Providing quality health care is still the main objective and should be kept in mind at all times.

  • Keeping on top of your health care program can make a difference in your employee morale.

Health Insurance Checklist

Good plans should cover:

  • Inpatient hospital services

  • Outpatient surgery

  • Emergency services

  • Physician visits (in the hospital)

  • Office visits

  • Care by specialists

  • Skilled nursing care

  • Medical tests and X-rays

  • Preventive care and checkups

Good plans may or may not cover these options:

  • Prescription drugs

  • Mental health care

  • Drug and alcohol abuse treatment

  • Home health-care visits

  • Rehabilitation facility care

  • Physical therapy

  • Hospice care

  • Maternity care

  • Chiropractic care

  • Alternative health care

  • Well-baby care

The best plans may waive the deductible for preventative care, and effectively pay 100 percent of all costs for routine procedures, such as annual physicals, age-appropriate cancer screenings, pre-natal care, and required immunization for children covered by the policy.

When you buy a policy, the first premium is usually due at the time you sign the purchase agreement. Your check for will also include monthly administrative fees, and perhaps an initial setup fee as well.

Remember that direct agents, independent agents, and brokers all get a commission on the policies they sell.

Selecting An HSA Custodian for Your Employees

You can set-up HSA accounts for you and your employees with an Account Custodian, such as a bank.  A good HSA provider will have the following features:

  • Easy deposits — in person, by mail, by electronic transfer, or through an automatic payroll deposit mechanism.

  • Easy withdrawals with a checkbook or debit card.

  • An attractive daily compound interest rate on your deposits (2% APR is the current norm).

  • Reasonable charges for administering the account (annual fees of $3 per month are reported as the norm, although some vendors offer “no fee” accounts).

  • Ability to check balances and recent account action at any time, by phone, by web and by monthly printed account summaries.

  • A yearly printed statement of all deposits and detailed data on all debits or expenses, to satisfy the IRS requirements for reporting.

  • FDIC insurance.

Tips for Smaller Businesses

Trade associations, local business groups, state and local governments may offer you the chance to join a "pool" of businesses in a group plan; often these groups, because they are larger, get better rates. If the group plan offers a qualifying high-deductible policy, this may be a good route for your small business. If your small business has three or more employees, you can be your own "group," and usually get a better rate than an individual would.

Be aware that if you are self-employed and a sole proprietor, a major insurance company may not actively seek your business. You may be small commission to them – or you may be, in their estimation, uninsurable. This is particularly true if you have not had a health insurance policy in force within the last year.

Big insurance companies generally charge smaller business more, even for high-deductible policies. They may advertise what seem to be comparatively low rates, but their application forms usually state that, upon reviewing your application, they will reserve the right to offer you a slightly different plan at a higher premium cost.

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IRS Qualifying Medical Expenses

  • Abortion
  • Acupuncture
  • Alcoholism Treatment
  • Ambulance
  • Artificial Limb
  • Artificial Teeth
  • Bandages
  • Birth Control Pills
  • Braille Books and Magazines
  • Breast Reconstruction Surgery (post-mastectomy only)
  • Capital Expenses (see note)
  • Car Modifications (for disabilities)
  • Chiropractor
  • Christian Science Practioner
  • COBRA Payments
  • Contact Lenses & Solutions
  • Crutches
  • Dental Treatment
  • Diagnostic Devices (i.e. blood sugar test kits for diabetics)
  • Drug Addiction Treatment
  • Eyeglasses
  • Eye Examinations
  • Eye Surgery
  • Fertility Enhancement (some
  • treatments excluded)
  • Guide Dog or Guide Animal
  • Hearing Aids
  • Hospital Service
  • Laboratory Fees
  • Laser Eye Surgery
  • Lead Paint Removal In Home
  • Learning Disability
    Legal Fees (with restrictions)
  • Lodging (treatment-related only,
  • and with restrictions, up to $50 per person)
  • Long Term Care Insurance
  • Long Term Care (Some)
  • Meals (treatment related, with restrictions)
  • Medical Conference Fees (relating to chronic illness; no lodging or meals)
  • Medical Information Plan
  • Medicare Parts A and B
  • Medicines (prescribed)
  • Mileage (12 cents per mile)
  • Nursing Home
  • Nursing Services
  • Operations
  • Optometrist
  • Organ Donors
  • Osteopath
  • Oxygen
  • Prosthesis
  • Psychiatric Care (including costs for residential care)
  • Psychoanalysis
  • Psychologist
  • Special Education
  • Sterilization
  • Stop-Smoking Programs
  • Surgery
  • Telephone modifications (for disability)
  • Television modifications (for disability)
  • Therapy
  • Transplants
  • Transportation (treatment related)
  • Trips (for treatment)
  • Tuition (special education only)
  • Vasectomy
  • Vision Correction
  • Weight-loss programs (only if prescribed)
  • Weight-loss foods (only if prescribed)
  • Wheelchair
  • Wheelchair maintenance
  • Wigs
  • X-Rays

Note: Deductions for capital improvements that relate to modifications of a home to make it more accessible to handicapped family members are calculated by taking into account the resale value of your home before and after the modifications.

For more details on what's qualified and how to calculate deductions, see IRS Publication 502 (http://www.irs.gov/pub/irs-pdf/p502.pdf) or contact a qualified tax advisor.

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Accounting & Payroll

Rules For Reporting Premium Costs and HSA Contributions

Contributions into an HSA can be made either by an individual or by an employer. If the individual makes the contribution, the amount is DEDUCTIBLE from the individual’s TOTAL INCOME (Line 22 on the current version (2006) of Form 1040).

If the employer makes the contribution, the amount is EXCLUDABLE from the employee’s WAGES (Line 7 on the current version (2006) of Form 1040). The excluded amount is supposed to be noted on the employee’s W-2 paperwork.

If the employer pays for all of the employees’ high-deductible insurance premiums, only the employer is entitled to deduct this sum as a business expense.

LLC (Limited Liability Companies) and LLP (Limited Liability Partnerships)

Small organizations often operate as an LLC. Under the current tax laws, single-owner LLCs are taxed as if they were sole proprietorships. LLCs with multiple owners get the same tax treatment as a partnership unless they elect to be treated as a corporation. LLPs get the same tax treatment as a partnership. Thus, there are no special tax advantages between LLCs or LLPs under the HSA program.

C and S Corporations

With a “regular” or C Corporation, your business must pay its own income tax on the taxable profits of your corporation. The tax rate for corporations varies by a few percentage points from what is due from married or single taxpayers. Personal service corporations (doctors, lawyers, engineers, architects, etc) are taxed at a flat rate of 35 percent of their net profit for the year. If you and others pay yourselves a salary from a C corporation, your health insurance premium costs are a business deduction for the corporation. If you and others are drawing a salary from the income that derives from your corporate business, each of you have to pay a personal income tax on that income. After-salary profits are taxed to the corporation. Upon eventual distribution of the profits you and others pay tax again – the dreaded “double tax” on the distributed profits on your personal tax return.

Tax rules for a “special” or S Corporation are similar to those for a partnership, i.e., you pay tax on your salary and your share of after-salary profits. If an individual’s shareholding in an “S” Corporation is more than 2 percent, that person is eligible to deduct the cost of company-paid health insurance premiums as a gross income “adjustment” on the Form 1040. Other shareholders are treated as employees in the manner of C Corporations.

Corporations reporting taxable income (profits) of less than $100,000 qualify for a significantly lower corporate tax rate. Many small corporations therefore strive to find as many business deductions as possible, to get under the $100,000 limit.

HSAs are a new way to get there. Because owner salaries and compensation are deductible as a corporate business expense, contributions into an HSA can cut both the corporate tax and income tax at the same time.

Because of the non-discrimination rules for HSA contributions, a corporation with many employees will set a practical limit on contributions to all its employees, large and small.

Excluding Contributions From An Employee's Taxable Income

On a payroll you must calculate withholding in accordance with government tables to cover the employee’s income tax. Federal Income Tax requires this withholding, as do the majority of states that have State and/or Local Income Tax. Contributions to HSAs on behalf of employees are exempt from these taxes, and join the list of other forms of worker compensation that are not taxed:

  • Generally all health coverage policy premiums

  • Generally all employer contributions to employee retirement plans

  • All worker’s compensation premiums or benefits

  • Extra sick pay or disability (after the first six months)

  • Reimbursements for moving expenses, parking garages, public transit (subject to certain limits)

  • Reimbursements for business expenses by employees (T & E) when these are accounted for to the employer
More Tax Relief for Employers

In addition to withholding for income tax, you must withhold a percentage of each employee’s pay for Social Security and Medicare under The Federal Insurance Contributions Act (otherwise known as FICA) towards the benefits they will one day receive from Social Security and Medicare.

In tax year 2006, the tax rate of a paycheck is 7.65%:

  • 6.20 percent for Social Security

  • 1.45 percent for Medicare

But wait, there’s more: an employer must also pay an equal amount of taxes to the government on behalf of the employee. And, pay the employer's share of FICA on behalf of each worker.

For highly paid employees, there is a FICA ceiling. For tax year 2006, the company does not have to pay FICA once it has paid the first $94,200 in wages per person. There is no Medicare ceiling; no matter what the company pays its highest-paid worker, the company still has to take out the Medicare tax.

Under the HSA program, employer contributions to worker HSAs are not subject to any of these taxes, nor are they considered to be gross wages when calculating a variety of other taxes, such as Withholding Unemployment Tax (FUTA). Unemployment tax benefits are regulated by a combined state and federal program. Just like income tax, the company has to withhold both a federal tax (FUTA) and a state unemployment tax. The current percentage for federal withholding for FUTA is 6.2%. It is a single flat rate, paid up to a ceiling on the first $7,000 of a worker’s pay.

The company’s state unemployment tax rate will vary from state to state. The company may also have to pay Disability Insurance Tax. In certain states (notably New York and California) this is a tax that pays for a mandated state disability insurance program must be paid and/or withheld by the employer. Under current federal rules, employer contributions to worker HSAs are exempted from these taxes as well.

Setting Up Your Payroll For HSAs

Basic First Steps (Checklist)

___ Obtain Employer Identification Number (EIN) for your business. You must do this if you plan to pay wages to at least one other person beside yourself. To apply for a number, use IRS form SS-4. You can do this online.

___ Decide how frequently you’ll issue paychecks (Weekly? Biweekly? Monthly?).

___ Decide which of your workers are full time employees. Some of your help may wish to be paid as independent contractors, if eligible.

___ Obtain a completed withholding application (W-4 form), Social Security Number, for each employee.

___ Make a note to file 1099s for each independent contractor you expect to pay more than $600 in this tax year.

Working With the W-2

Each employee gets a W-2 by January 31st for the previous tax year. Copies of each employee’s form are also sent to the IRS in early February, along with a summary sheet, the Transmittal of Wage And Tax Statements, also known as IRS Form W-3. Employees who leave your company before the tax year is over may also request a copy of their W-2 earlier, so they can see what the total taxes were relating to their employment.

Wages (plus tips and compensation) for each employee are totaled for the year in Box 1. The amount of wages subject to Social Security (the first $94,200 of wages) goes into Box 3. The amount of wages subject to Medicare tax (everything after the first $400) goes into Box 5.

The amount of withholding for each tax (Box 2, 4, 6) should equal the amount you’ve already paid in monthly and quarterly installments. For how to calculate withholding, see IRS publication #15-T.

Not everyone will use Boxes 7-11. These report Social Security paid on tips and gratuities, hardship advances for those who will qualify for the Earned Income Tax Credit (EIC).

“Non-Qualified Plans” are other payouts made by the employer on behalf of the employee that may not be tax-exempt from FICA or other payroll taxes. These include distributions from pension plans, IRAs, and profit-sharing plans. For example, if an employee leaves and “cashes out” vested pension funds, the sum is noted on the W-2, and the employee will be responsible for the taxes.

Where then, are the deductions for a company’s contributions to an employee’s HSA? They are tucked away in Box 12, and identified with a special code “W.”

Under Code “W”

Box 12 is the section reserved for payments that generally will be tax-exempt from gross income, and hence from gross income taxes. These include income deferred via a 401(k) plan (Code “D”), Moving Expenses (Code “P”) and salary reductions to a SIMPLE (Code “S”).

Employer contributions to a Health Savings Account are Code “W.” So, in Box 12, if you made a $200 contribution to a worker’s HSA, you’ll indicate this by “200.00 W”.

If you do a W-2 for yourself or a spouse, this is where you will indicate your contribution to your own HSAs. If you contributed $4,500 to your HSA, write down “4500.00 W”.

On the employee’s tax return, any figure that appears in Box 12 must be matched up as a pre-tax adjustment on the 1040. This is how the IRS will track HSA deductions. This is how they make sure that when the employer makes the contribution, only the employer gets the tax benefits.

Box 13 requires you to check off squares if the worker was exempt from any withholding (part time worker or agent paid only by commissions), or “actively participated” in any qualified pension, profit-sharing, or stock-bonus plan, including 401(k) SEP or SIMPLE plans. (Again, this is an IRS match point.)

Box 14 is reserved for other adjustments, which are non-elective, such as required employer-employee matching contributions to pension plans. Another match point. Boxes 15-20 are where you report wages and withholding payments for state and local tax.

This should get your company’s accounting and payroll up to speed on HSAs.

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