HSA Tax Benefits

All employer contributions to employee HSAs are made on a “pre-tax” basis. Employers may make pre-tax contributions to their employees’ HSAs either through a Section 125 plan or through a direct contribution. Contributions can be made in one lump sum or in payments throughout the year. Deposited funds belong to the employee. The combination of employer and employee contributions cannot exceed the IRS annual maximums.

Direct Employer Contributions (outside a Section 125 Plan)

  • Employer contributions can generally be excluded from federal income tax, Social Security tax, Medicare tax, federal unemployment taxes (FUTA) and state unemployment taxes.*
  • Employers must make “comparable” contributions to their employees’ HSAs, on behalf of all of their eligible employees, in order to be tax-deductible as an employee benefit. In order to be considered “comparable,” the IRS requires that the amount be either an equal dollar amount or percentage of the deductible for the high deductible health plan. Employers are allowed to treat different categories of employees differently for the purposes of contributions. Those categories include:
    • Full-time versus part-time
    • Self only, self plus one, self plus two, or self plus three or more
    • HSA-eligible versus non-eligible

An exception to the comparability rules allows employers to contribute more to the HSAs of non-highly compensated individuals. For this purpose, the definition of "highly compensated employee" is based on the same definition used for qualified retirement plans.

Failure to comply with these rules may result in a 35 percent penalty, so employers are encouraged to consult their tax adviser or legal counsel to make sure they comply with these rules.

  • Employers are not allowed to take an additional deduction for the payroll taxes (Social Security tax, Medicare tax and FUTA) associated with employee “post-tax” contributions.

Employer Contributions through a Section 125 Plan

Employers may choose to make contributions to their employees’ HSAs as part of a Section 125 plan (also known as a “cafeteria plan” or a “salary reduction plan”). Employers gain greater savings by allowing their employees to contribute on a “pre-tax” basis to their own HSA via payroll deduction. Employer and employee contributions may be combined and forwarded directly to UMB.

  • Employer contributions can generally be excluded from federal income tax, Social Security tax, Medicare tax FUTA and state unemployment taxes.*
  • Employers also derive HSA tax benefits by not paying Social Security tax, Medicare tax and FUTA on their employees’ contributions. These tax savings are only achievable through the Section 125 plan.
  • Employers contributing through a Section 125 plan are not subject to the comparability rules described above, but are subject to a different set of rules that require the employer to ensure the contributions do not favor highly compensated employees. If an employer chooses to offer “Matching Contributions,” it must be done through a Section 125 plan. 

*States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. If you have questions about your tax implications, consult your tax advisor.

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