Most businesses are looking for cost savings. Combine that with the recently enacted health care reforms, which could result in health benefits being even more costly for employers, and businesses have a great reason to revisit health savings accounts! Health savings accounts (HSAs) provide a cost-effective method for employers to provide health insurance while offering employees a tax-favorable way to fund future medical needs.
What is an HSA?
An HSA is a tax-exempt trust or custodial account, similar to an IRA, established to pay qualified medical expenses in conjunction with a “High-Deductible Health Plan” (HDHP).
HSA Eligibility “Eligible individuals” can establish an HSA for any month they:
- Are covered by an HDHP on the first day of such month.
- Are not covered by any other health plan that is not an HDHP (e.g., spouse cannot have insurance that is not an HDHP).
- Are not enrolled for benefits under Medicare (i.e., under age 65).
- May not be claimed as a dependent on another individual’s tax return.
Note: Eligibility to contribute to an HSA does not depend on income (no limits) or employment.
High-Deductible Health Plans
A high-deductible health plan (HDHP) is any health plan that for 2017:
- Has an annual deductible of at least $1,300 and annual out-ofpocket expenses (including the deductible) of not more than $6,550 for individual coverage, or
- Has an annual deductible of at least $2,600 and annual out-ofpocket expenses (including the deductible) of not more than $13,100 for family coverage. Note: An HDHP can be a self-insured health plan sponsored by an employer.
The maximum annual amount that may be contributed to an HSA for 2017 is $3,400.
Tax Treatment of an HSA Contribution for Employees
Contributions to the HSA are “pretax” and not subject to federal income tax or employment taxes (FICA, FUTA, SUTA), provided that the employer sponsors a cafeteria plan and that HSA contributions are made via payroll deduction. Three states— Alabama, California, and New Jersey—do not conform to federal legislation and do not recognize HSAs for state income tax deduction purposes.
Tax Treatment of an HSA Contribution for Employers Contributions to an HSA are deductible by the employer and excluded from employees’ income. An HSA is not subject to COBRA continuation coverage.
Triple-Tier Tax Benefits
- Earnings inside the HSA are not included in the eligible individual’s income.
- Contributions are tax-deductible, regardless of income.
- Distributions are not included in the eligible individual’s income if the distribution is for “qualified medical expenses.”
Note: There is no time limit to reimburse expenses from an HSA. Distributions from an HSA can be used to reimburse prior-years expenses as long as the expenses were incurred on or after the date the HSA was established. There is also no “use it or lose it” provision as there is for flexible spending plans (Section 125, or cafeteria, plans).
Qualified Medical Expenses
Qualified medical expenses are expenses paid for the account beneficiary, spouse, or tax dependents for medical care [as defined in IRS Code Section 213(d)] but only to the extent the expenses are not covered by insurance or otherwise. Generally, health insurance premiums are not qualified medical expenses. However, an HSA can pay for long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. In addition, for individuals over 65, premiums for Medicare Part B or D and retiree medical coverage for HSA holders age 65 and older, other than a Medicare supplemental policy, can be paid from an HSA
HSAs generally cannot be used by retired HSA holders for their insurance premiums prior to age 65, with the exception of COBRA or USERRA or premiums paid while unemployed. As illustrated in the example above, HSAs can help reduce employee benefit costs for your business. Wipfli’s Employee Benefits Specialists can assist you in analyzing your health insurance benefit plan along with employee benefit plans in general.
Please contact your Wipfli relationship executive or one of our Employee Benefits Specialists to discuss how it could impact you.
About the Authors
Pam Branshaw, Partner, is a certified public accountant and a certified employee benefits specialist and is in charge of Wipfli’s employee benefits practice for the firm. She has over 30 years of experience in employee benefits auditing, recordkeeping, and consulting, allowing her to guide Wipfli’s clients in crafting wellthought-out and solid benefit plans. Please contact Pam at firstname.lastname@example.org.
Bob Buss is an executive director of benefit services with over 30 years of experience in employee benefits administration and consulting. His years of experience in individual, corporate, and exempt taxation have provided him with the extensive background necessary to provide clients with comprehensive solutions and ideas related to employee benefit plan issues. Please contact Bob at email@example.com.
Tom Krieg is a partner and certified public accountant who has served his clients’ needs for more than 20 years. His expertise in employee benefits, accounting, and corporate taxation, coupled with his knowledge of sound, practical business strategies, has contributed to the success of his clients. Please contact Tom at firstname.lastname@example.org.