Employee job satisfaction is usually enhanced by the receipt of a major fringe benefit such as health insurance. Business owners can also derive a tax benefit by using health savings accounts to provide insurance for their employees.
The cost of traditional health insurance policies has increased over the years. A health savings account, also known as an HSA, generally costs less since it is paired with a high-deductible health insurance policy. As an employer, you can fund HSA plans on a pretax basis for both your company and your employees.
Savings on payroll taxes
When paying regular wages, an employer pays a matching amount for Social Security tax and Medicare tax withheld from the employee. Your contribution to an employee's HSA is generally not taxable to the employee, and it has no requirement for the withholding of employment tax. Your business thus has no matching requirement on the contribution.
There are limits on HSA contributions eligible for the preferential tax treatment. For an HSA plan covering just one individual, the 2016 contribution limit is $3,350. For a family plan, the annual HSA contribution limit is $6,750. For employees who are age 55 or older, you may be able to contribute an additional amount of $1,000 annually.
Funds withdrawn from an HSA are tax-free to your employee if used for qualified medical care. Any HSA balance not spent during the year remains in the account. As long as an employee is eligible for an HSA, any unused account balance rolls over from year to year.
Once your company funds the HSA of an employee, the worker owns the account. After the annual deductible amount of the health policy has been reached, your employee can withdraw funds for additional medical expenses. Some HSA plans provide a debit card to the account owner for withdrawals.
Even though your HSA contributions are not taxable to your employees, the payment amount must be reported on the IRS Form W-2 sent to each employee. Box 12 of Form W-2 is used to report various employee costs and benefits. The code W should be entered in box 12 alongside the HSA contribution amount.
Individual tax filers with an active HSA must file IRS Form 8889 with their income tax return to report HSA activity. Form 8889 calculates whether any HSA activity is taxable, based on the comparison of contributions and qualified withdrawals.
There are additional regulations surrounding equitable HSA funding for various job classifications within a company. Contact a payroll service professional such as Risley Annette CPA for more information about the advantages of providing your employees with health savings accounts.