It’s no secret that health savings accounts (HSAs) offer numerous tax benefits. These tax savings are one of the primary reasons why HSAs are gaining traction in the market. However, while HSA participation continues to increase at a rapid pace, the majority of the attention when it comes to HSA tax benefits is focused on employees. While those HSA tax benefits are great, there are less well-known HSA tax benefits for employers that are just as significant. These employer HSA tax benefits should not be kept a secret. So, whether you’re an employer that already offers an HSA program to your employees or you’re just looking into the affordability of an employer-sponsored HSA program for your company. You need to understand HSAs and the benefits they have for you.
What is an Employer Sponsored HSA?
An HSA is a tax-advantaged savings account that can be used to help your employees pay for eligible medical expenses when combined with a high-deductible health plan (HDHP). An HSA-compatible HDHP often has lower monthly premiums than lower-deductible health insurance plans. And HSA contributions are tax-deductible up to annual IRS limits. A small business can deduct all employer contributions to employee HSAs as an income tax deduction. Employers also do not pay payroll taxes on employees’ pre-tax contributions. Employees’ lower premiums under an HSA-compatible HDHP may result in cheaper cost-sharing for the business overall. It is important to note that not all HDHPs are HSA-eligible, so be careful when choosing.
Setting Up An HSA
Creating an HSA is a simple process. Here’s a rundown of the steps.
Determine Eligibility – Determine whether your employees have HSAs through approved HDHPs supplied by the company or acquired privately. Then, select how much employees will contribute to their HSAs and whether your company would match their contributions.
Create a Cafeteria Plan – A section 125 cafeteria plan allows employees and employers to contribute to the HSA tax-free. Employees, spouses, and dependents can all participate in the plan. One of these programs might be set up by your company or a payroll agency. Employers must write a document outlining the benefits offered, contribution limitations, and participation restrictions. As well as other information required by the IRS before launching a section 125 benefits plan. Depending on the plan, they may also be required to conduct non-discrimination tests to verify that it does not favor highly compensated or specific employees. Starting a cafeteria plan can be challenging without the right understanding. Which is why many employer’s hire a third-party administrator to set up and administer their cafeteria plan.
Manage Contributions – Employees can submit HSA payments to their custodian or bank-administered account after the Section 125 plan is implemented. If you wish to contribute to your workers’ HSAs, you must submit your payments to their accounts as an employer. At the close of the fiscal year, your company must also supply your employees with the necessary tax documentation, including W-2s.
Keep in mind that annual HSA contribution restrictions must be followed by both employees and employers. For 2023, the HSA contribution limits for self-only coverage are $3,850 and $7,750 for family coverage. For 2024, the HSA contribution limits for self-only coverage will be $4,150 and $8,300 for family coverage. Those aged 55 and up are eligible for a $1,000 catch-up contribution.
Employer Tax Benefits
When it comes to tax benefits, HSAs have the unrivaled ability to benefit both employees and employers. While employees can profit from the triple tax advantage that HSAs provide. Businesses can also benefit from significant HSA tax advantages. Employers can obtain HSA tax benefits through payroll and FICA tax benefits. To maximize HSA employer tax benefits, you must first set up your cafeteria program.
With this setup, you benefit from even lower payroll taxes if you choose to contribute to your employees’ HSAs. Because your employer HSA contributions aren’t included in your employees’ income and thus aren’t subject to federal income tax, Social Security or Medicare taxes (commonly known as FICA tax). Employer HSA payments are also tax-deductible as a company expense, so you gain both on the front and back end. It’s important to know that FICA tax is a 15.3% split tax burden between the employee and the business. Company FICA tax savings can be so significant that many employers prefer to increase their company HSA contributions in order to maximize their FICA tax savings. This method can be a sensible way to increase your employees’ total compensation while keeping your bottom line in mind.
Maximize Your Benefits
Regardless of how you handle employer HSA contributions, the next step in making the most of your HSA program and maximizing employer tax benefits is to increase both the number of employees who actively participate in your HSA program and the amount of pretax money they contribute to their HSAs through payroll deduction.
As an example, a firm with 100 employees that use an HSA through its cafeteria plan can save more than $50,000 per year in FICA tax savings alone. That employer would save six figures—a significant sum—in two years. Money that would otherwise have been paid out as a tax expense. Essentially, the more employees who have HSAs and contribute to them, the lower your payroll taxes will be, as will your income and FICA tax savings.
Small Business Owner’s HSA
You may be wondering if you qualify for an HSA as a small business owner. This is determined by the nature of your business as well as your health insurance. A requirement for establishing and contributing to a small business HSA is that your health insurance needs to be an HSA-eligible HDHP. When it comes to HSA contributions for individuals, business owners face different requirements than their employees. There are extra requirements that apply depending on the type of small business you run.
Self-Employed HSA
A self-employed HSA option is fundamentally identical to choices for employers. Because an HSA is not a sort of insurance, you must have an HSA-compatible health plan as a self-employed individual. According to IRS HSA rules, you can only open an HSA if you have an HSA-eligible high-deductible health plan (HDHP). It doesn’t matter if the qualified HDHP is yours or your spouse’s; it just has to be HSA-eligible. If you are classified as a dependent on another person’s tax return, you are not eligible for a self-employed HSA option.
A self-employed HSA can be not just a way to get tax savings on healthcare spending, but also an essential component of a retirement plan. Because, in most cases, self-employed individuals and small business owners do not save as much for retirement as those who are traditionally employed. An HSA can help you save money on eligible medical expenses while also serving as a retirement account for you.
You can deduct some of your contributions on your personal income tax return if you set up an HSA and contribute to it as a sole proprietor. You can claim the deduction if you make a profit during the tax year. However, you may not contribute more to your HSA than your net self-employment income. While many employees can contribute to their HSA before taxes, as a self-employed individual, you can make HSA payments after taxes and then deduct them as a line item on your Schedule C. It requires slightly more paperwork, but it is still a simple approach to save money on qualified medical bills.
S Corp and C Corp Owner HSAs
The IRS has particular requirements for specific corporate entities based on ownership—whether held by individuals or investors. Certain corporate entities are restricted from receiving HSA funding as a result of these requirements. HSA financing limits apply if you own 2% or more of a S Corp. When it comes to employer contributions to a S Corp HSA, the company cannot provide owners with a tax-free contribution. Contributions from the S Corp firm to the owners’ HSAs are taxable income. You cannot make pretax contributions to your HSA. While S Corp HSA contributions are taxable to the owners, they are also tax deductible to the company as a compensation expense. Even after-tax HSA contributions provide a considerable tax break on eligible medical expenses.
On the employee side, or if you own less than 2% of a S Corp, the restrictions do not apply. Which means that a S Corp business can make tax-free contributions to their employees’ HSAs as long as they comply with current IRS standards on employer contributions. Because a C Corp is an entirely different legal entity, the IRS treats owners the same as employees. If you own a C Corp, you are eligible for your company’s HSA, including making pretax contributions to your HSA account. Remember that all contributions must adhere to current IRS requirements on employer HSA contributions.
LLC HSAs
If you are a single member LLC with an HSA-eligible high-deductible health plan (HDHP). Your HSA will function similarly to that of a self-employed sole owner. While you will not be able to contribute to your HSA before taxes, you will be able to contribute after-tax to your HSA and claim a line item deduction on your Schedule C. Bottom line, even as a single member LLC, having an HSA saves you money on healthcare costs. However, if you are an LLC with workers, you cannot directly participate, but offering this type of HSA cafeteria plan to your employees has numerous advantages.
Working With EZ
If you want to save money while still looking after your employees’ health and finances, offering an HDHP with an HSA is a terrific alternative. If you’re not sure where to start with HDHPs, HSAs, and cafeteria plans, EZ can help you get started and answer all of your questions along the way. We can also provide you with quick, accurate quotes and enroll you in an excellent plan – all for free! There is no hassle and no obligation. To get started with us today, simply enter your zip code in the box below. Or call 877-670-3531 to talk with a representative immediately.
There are many ways you can describe the health insurance system, but when it comes to enrollment, “flexible” isn’t always one of them. Each year, you choose your company’s plan and your employees have a set enrollment period (either the ACA open enrollment period or another one of your choosing) during which they can sign up. Once they do, that’s pretty much it for the year, unless they experience a qualifying life event, like marriage or the birth of a child. But 2020 hasn’t been an ordinary year. The IRS has decided to recognize this fact and allow mid-year changes to healthcare plans, and they are leaving the decision about whether to allow these changes up to you, the employer.
What the IRS Is Allowing
The IRS has decided to allow mid-year changes to healthcare plans including cafeteria plans.
If you offer your employees a healthcare plan under IRS Section 125 – otherwise known as a Cafeteria Plan – and/or a flexible spending account (FSA), then you have a decision to make this year. The normally rigid rules surrounding when and how employees can make changes to these plans have been suspended by the IRS, and you now have the option of letting them make a one-time change to their plan. This comes at a time when employees may need relief from premium payments, extra coverage, or even more time to use their FSAs. You are not required to let employees make any changes, but if you decide to, you can allow them as many options as you like, including:
Enrolling in the plan if they had previously declined coverage
Changing from a higher to a lower cost plan, or vice versa
Moving from family to individual coverage, or vice versa
Dropping coverage, but only if they have another plan in place
Again, you don’t have to allow all or any of these changes. You also have to be sure that you make the options fair and equal to everyone. The IRS even suggests that employers only offer options that would improve healthcare coverage, such as moving from an individual to a family plan or from a plan that covers very little to a more comprehensive plan, to make clear that these changes are meant to benefit your employees, not simply lower your premium contributions.
In addition to changes to their healthcare coverage, employees now also have more flexibility when it comes to their FSAs. Your employees might be finding it harder to make the most of their FSA dollars these days because they haven’t been going to the eye doctor or dentist, for example. If they use these accounts for dependent care, they may have been unable to send their children to summer camp this year. For this reason, the IRS has extended the grace period for using 2019 funds through the end of 2020. Employees will also be able to roll over more of their funds through 2021.
What Employers Need to Consider
Your employees might welcome the chance to change their insurance policies right now, but you also have to think about how it will affect your business. Consider:
How it will financially impact your business if employees drop their plans, especially if it is the healthier employees who opt out and the employees who need more care who stay in
Your plan’s requirements. If your plan is fully-insured, there may be a minimum number of participants, so having employees opt out or change plans might mean having to rethink your whole healthcare policy.
The admin! It will take a lot of time and resources to review and process all of the changes.
It’s a tough decision to make. These are crazy times, and both you and your employees have a lot on your plates. As a small business owner who may already be struggling to provide healthcare, but who also wants the best for your employees, you may want to allow changes, but limit them. Consider following the example set out by the IRS and offer your employees the ability to enroll in or upgrade their plans. You can also decide to do an emergency stock-take: throw together a mid-year employee health survey and see what is on your employees’ minds. You have until December 31, 2021 to adopt your plan (which can be retroactively implemented), so don’t stress too much!
If you find yourself completely confused, then remember, EZ’s knowledgeable agents can answer any questions you have. And if you find YOU need a change in policy for your company, then come to us for instant, accurate, free quotes. We’re ready, willing, and able to shoulder some of the burden of small business healthcare, so get started with us today. Simply enter your zip code in the bar above. Or to speak with an agent directly, call 888-350-1890. No hassle, no obligation!
Any way you look at it, offering health insurance to your employees is a good thing to do. Not only does a healthcare plan keep your employees healthy and protect them from huge medical bills, but studies have also shown that it is the most desired benefit you can offer. Employers who offer healthcare are more likely to attract high quality job candidates and also to retain the employees that they already have. So, if you’ve carefully researched and chosen a plan and offered it to your employees, but only a few have decided to enroll, what could be the problem? Here are 4 common reasons why employees choose not to enroll in an employer-based healthcare plan, and what you can do about it.
1. Your Plan Doesn’t Match Your Employees
The first reason employees choose not to enroll in your healthcare plan is that they don’t like it.
The first reason employees may choose not to enroll in your healthcare plan may seem obvious: they just don’t like it. Even if you’ve done hours of research and you think you’ve found the perfect PPO plan with a low deductible, you may not be taking into account your employees’ ages, family size, and financial situation. If most of your workforce is young, healthy, and childless, then they might prefer a high deductible health plan. But, if you have a very diverse workforce, then they might all have different needs. In that case you might want to look into an la carte healthcare plan, like a cafeteria plan.
Since asking your employees about their healthcare is a pretty sticky subject, you may be unsure how to solve this particular problem. The answer is actually very simple and will only take a little bit of time: give your employees a healthcare survey. Ask them all the relevant questions to gauge what they are looking for in a healthcare plan, and be sure to keep it anonymous to encourage participation. Their answers will give you a much better idea of what they want and where you should be looking for a plan.
2. The Network Isn’t the Right Fit
Most healthcare plans have a set network of providers that the insured can see without incurring out-of-network charges. So, even if your employees are happy with the PPO plan you chose for them, they might be unhappy with the providers included in the plan’s network. Some employees may find that their trusted doctors are not included in the offered plan – and that could be a deal breaker for them.
The solution to this problem can be the same as above: ask about your employees’ provider and network preferences in a survey. Be as specific as possible, asking about what doctors, hospitals, facilities, and prescription drugs they would like covered.
3. The Total Costs Are Too High
Even if you’re contributing 50% of your employees’ premium costs, that cost can still take a big chunk out of their paychecks.
Premiums, deductibles, copays, coinsurance…there are a lot of costs to add up when it comes to a healthcare plan. Even if you’re contributing 50% of your employees’ premium costs, that cost can still take a big chunk out of their paychecks. And premiums aren’t the only thing they need to budget for: around 80% of covered workers have a deductible they need to meet before their healthcare costs are covered. The average deductible for covered workers in small businesses is over $2,000, which is a very significant sum for a working family.
One way to help offset these costs and encourage your employees to enroll in your plan is to consider putting money into a tax-advantaged account like a flexible spending account (FSA) or health savings account (HSA). Both you and your employees can make pre-tax contributions to these accounts, and your employees can use the funds in them to pay for qualified healthcare expenses. An FSA can be used with any kind of healthcare plan, but the contributions are “use it or lose it.” In contrast, an HSA must be combined with a qualified high deductible health plan but the contributions can roll over each year.
4. Your Employees Don’t Understand Their Options
There are some that believe that effectively explaining and communicating the importance of benefits to your employees is just as important as offering the right plan. As a business owner, you already know that people don’t buy what they don’t understand. Employees need to understand the benefits you’re offering them and how important they are to themselves and their families in order to want to spend their money on them.
A recent survey by Colonial Life found that one-third of employees spent less than 30 minutes looking at their benefits options, and another third spent less than an hour. And this doesn’t just affect them: the same survey found that the employees who sped through their benefits choices were 55% more likely to leave their jobs, 32% more likely to feel dissatisfied with their jobs, and 18% less likely to feel cared for by their employer.
The solution to this problem is simple: communication. As the employer, you need to find an effective communication strategy that works for your employees. In addition to the printed or digital material you offer, consider holding individual and/or group meetings to talk about benefits. And don’t assume that just because some of your workers are younger, they want everything to be done online. Another Colonial Life survey found that Gen Z and Millennial workers are actually slightly more likely to want human interaction when learning about or enrolling in benefits: 91% for Gen Z and 83% for Millennials, as compared to 76% of employees overall.
At EZ.Insure, we know that you’re working hard to find the best options for your employees, but sometimes you just need someone to point you in the right direction. That’s what we’re here for. When you come to us, you’ll get your own personal agent who will give you instant, accurate quotes, answer all of your questions, and never, ever hound you with endless calls. And we do it all for free. You’ve got your employees’ best interests at heart, and we’ve got yours at heart, so get started with us today. Simply call 888-998-2027, or enter your zip code above.
What comes to mind when you hear the term “cafeteria plan”? Lunch! Well, these plans have nothing to do with what’s on the menu. “Cafeteria plan” is the informal name for Section 125 of the Internal Revenue Code, which allows employers to offer a la carte benefit options to employees. Employees can choose which of the offered benefits are right for them, and pay for them pre-tax.
What Are Cafeteria Plans?
Offer your employees more options of health insurance with a cafeteria plan.
Just like walking through a cafeteria and choosing dishes, with a cafeteria plan, employees can decide which healthcare options they want. Examples include vision, dental, or HSAs/FSAs. It is important to note that cafeteria plans are not a type of health insurance. They are a way to let employees use pre-tax money to pay for the types of coverage they choose.
To qualify as a cafeteria plan, the plan must include:
At least one qualified pre-tax benefit – these can include things like HSAs and FSAs, which allow employees to put aside pre-tax money to pay for medical expenses throughout the year
At least one qualified taxable benefit – for example, an employer may allow employees who don’t want any of the offered benefits to choose a cash alternative as part of their salary. This is in contrast to traditional group plans, in which an employee isn’t compensated for opting out of coverage. This cash will, however, be taxed.
The Advantages of a Cafeteria Plan
Cafeteria plans are an attractive option for a diverse workforce that is used to having choices. For employees, not only do they get to choose only the benefits that are right for them, but they also get significant tax advantages. They can contribute pre-tax, thus saving money. Because they are taking pre-tax money out of their pay, their paychecks will be smaller, and they will end up paying less in taxes.
For employers, there are a few main advantages:
Employees with smaller paychecks mean paying less in payroll taxes.
Employers may be able to attract and keep staff with a personalized benefits plan.
Unused FSA funds remain with the employer.
The Disadvantages of Cafeteria Plan
For employees, there aren’t many big disadvantages to having a Section 125 cafeteria plan, but there are a few things for them to remember:
Employees are locked into the plan they choose for the entire year – with only a few exceptions,One disadvantage of a cafeteria plan is that employees are locked in for a year.
employees must wait until the next enrollment season to make any changes
If employees choose a benefit like cash in place of coverage, they will incur a tax penalty.
Any funds put aside but not spent by the employee are forfeited – employees need to decide how much money to put aside at the beginning of the year, and they may not always get it right.
For employers, the main disadvantage of offering this type of plan to employees is the hassle. Because they are so individualized, they can take a lot of time and expense to manage.
Remember, whatever plan you’re considering offering to your employees, we can help sort through the mess. EZ.Insure is here to connect you to your own personal agent who can steer you in the right direction – for free! You will never be hounded by endless calls and you will always get the most accurate information. We promise everything will be quick, easy – and did we mention, free? To get started simply enter your zip code in the bar above, or you can speak to an agent by emailing [email protected] or calling 888-998-2027.
Maximize Your Benefits
For employers, there are a few main advantages: