More than 2 million Americans chose Health Savings Accounts as their healthcare insurance program in the 12 months ending in January 2010.
Much of this increase is attributed to the decision by many companies to offer HSAs either as a full replacement or as an option.
With the increase in company sponsored Health Savings Accounts as a benefit, some questions have arisen about employer contributions.
Employers can make tax-free contributions to their employees Health Savings Accounts in the following two ways:
Remember that once an employer contributes money into an employee's account, the money is owned by the employee from that point forward, regardless of employment. In other words, employees own the HSA accounts (similar to how they own a checking account) -- They decide how and when the money is spent. Before an employer makes contributions to their employees' HSAs, they should first consider making contributions to an employee's HRA.
Employer Contributions without a Section 125 Plan
Employers can make tax-free contributions to their employees' HSAs without using a Section 125 plan, as long as the contributions are "comparable" for all employees participating ("comparability rules"). Comparable contributions are contributions that are the same dollar amount or same percentage of the employee's deductible for all employees with the same category of coverage (i.e. self-only or family; FT or PT).
Employer Contributions with a Section 125 Plan
To avoid the comparability rules on their HSA contributions, employers often utilize a Section 125 plan. HSA contributions through a Section 125 plan are not subject to the comparability rules, but Section 125 nondiscrimination rules do apply. Nondiscrimnation rules restrict employers from making contributions excessively in favor of highly compensated employees. Employers typically use a section 125 plan to offer matching contributions to their employees and to save payroll taxes (7.65%) on all employee contributions.
See IRS Publication 969 for more information.
Virtually all Americans utilize (or have access to) a Cafeteria Plan at some point during their working career, yet many do not take full advantage of them. As a tax-paying American citizen, you should understand how a Cafeteria Plan works because, when utilized correctly, a Cafeteria Plan can increase your take-home-pay without any change in your expenditures.
A "Cafeteria Plan" (see Section 125 of the IRS Code) is a benefit provided by an employer which allows an employee to contribute a certain amount of his or her gross income to a designated "account" before taxes are calculated. This "account" can be used to reimburse the employee for insurance premiums, medical, or dependent care expenses throughout the plan year or claim period as the employee incurs qualified expenses.
Essentially, a cafeteria plan allows an employee to reduce their gross income, effectively reducing the amount they pay in Federal, Social Security, and some State taxes. This amounts to a savings of between 25% and 40% of every dollar they contribute to the plan. The employer also realizes savings on FICA withholding tax for each participating employee.
Ask your employer about Cafeteria Plans because they save you and your company money on taxes. Utilizing a Cafeteria Plan correctly should result in an increased net paycheck.