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Health Savings Accounts - Employee Benefit Cost Savings

May 08, 2018

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 upon income (no limits) or employment.


High Deductible Health Plans

A high-deductible health plan (HDHP) is any health plan, that for 2018:

  • Has an annual deductible of at least $1,350 and annual out-of- pocket expenses (including the deductible) of not more than $6,650 for individual coverage, or
  • Has an annual deductible of at least $2,700 and annual out-of- pocket expenses (including the deductible) of not more than $13,300 for family coverage.

Note:  An HDHP can be a self-insured health plan sponsored by an employer.


How much can be contributed to an HSA?

The maximum annual amount that may be contributed to an HSA for 2018 is $3,450 for a self-only plan and $6,900 for family coverage. Additional “catch- up” contributions ($1,000 for 2018) can also be made to an HSA if the individual is age 55 and older.


Tax Treatment of an HSA Contribution – Employees

Contributions to the HSA are “pre-tax” and not subject to federal income tax or employment taxes (FICA, FUTA, SUTA) provided that the employer sponsors a cafeteria plan and HSA contributions are made via payroll deduction. Three states – Alabama, California, and New Jersey – do not conform with federal legislation and do not recognize HSAs for state income tax deduction purposes. For 2018, Alabama will conform to federal legislation.


Tax Treatment of an HSA Contribution – Employers

Contributions to an HSA are deductible by the employer and excluded from employees’ income. An HSA is not subject to COBRA continuation coverage.


Tax Treatment of an HSA Account – 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” provisions like flexible spending plans (section 125 cafeteria plans).


Example: Employer Cost Savings

Total monthly family health premium ($500 deductible)



Total proposed HDHP family premium ($2,700 deductible)



Total monthly premium savings per month



Total annual premium savings (x12 months)



Employer share of annual savings (assumes 80% employer contribution)



Employee share of annual savings (assumes 20% employee contribution)



Employer contribution to HSA (to cover deductible increase)



Employee contribution to HSA (funded by premium savings above)



Total contribution to employee HSA (covers additional deductible)



Employer net savings per employee on family plan







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, USERRA (i.e. military leave), or premiums paid while unemployed.


As illustrated in the above example, 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.


Marci Boyarski, CPA
Partner in Charge, Employee Benefit Services
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Thomas Krieg, CPA
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