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HSA Contributions: A Guide To Compliance In 2023 For Employers

by Nickolas Gionis on Dec 15, 2022 10:49:14 AM

If you’re like many employers looking to offer an affordable health insurance option to your team, you’re probably familiar with health savings accounts (HSAs). Whether you already offer one or are planning to, you know that an HSA, paired with a high deductible health plan (HDHP), can be a more cost-effective option by allowing employees to save pre-tax money for medical expenses. But like other health insurance, there are specific requirements you need to be aware of to stay in compliance, including rules surrounding HSA contributions. To help you avoid costly fines, let’s dive into what those are.

In this article, we’ll discuss how employers make contributions, the limits for 2023, tax rules, and more. After reading this, you’ll understand what you need to do in order to keep your company compliant in the new year.

What are HSA contributions?

To help pay for out-of-pocket expenses not covered by a health plan, HSAs are financial accounts that workers or their family members can use to pay for eligible healthcare services. If you have a cafeteria plan, employees contribute to these accounts through pre-tax payroll deductions. If the HSA is not part of a cafeteria plan, an employee’s contributions are taxable and subject to applicable withholdings. Either way, contributions are capped by annual limits set by the IRS, which we’ll list in a bit.

Although employers are not required to, many choose to chip in as well. You can either make a lump sum contribution at the beginning of the year or set contributions per pay period. However, if you make additional contributions, it’s important to note that the employee owns the HSA and the full balance belongs to them if they retire or leave your company.

Who is eligible to make contributions?

In order to be eligible to make HSA contributions, an employee has to have a qualified HDHP. HDHPs have higher annual deductibles and also a maximum limit on the deductible and other out-of-pocket medical expenses employees have to pay.

For 2023, the minimum deductible for a policy to qualify as an HDHP is $1,500 for individual coverage and $3,000 for family coverage and the out-of-pocket maximum must not exceed $7,500 for individual coverage and $15,000 for family coverage.

In addition to being enrolled in an HDHP, there are some additional criteria employees must meet in order to be able to contribute to an HSA:

  1. They must not be enrolled in a health plan that is not an HSA-eligible plan like a full-purpose FSA
  2. They must not be enrolled in Medicare
  3. They must not be claimed as a dependent on someone else’s tax return

How do I make an HSA employer contribution?

If you decide your business will contribute to employee HSAs, you have two options:

  1. With a Cafeteria Plan: One way you can make employer HSA contributions is by creating a cafeteria plan. A cafeteria plan is an employee benefits plan administered under Section 125 of the federal tax code that allows participants to receive certain benefits on a pretax basis. That means, if you offer an HSA through a cafeteria plan, employees may contribute with pre-tax payroll deductions and can also contribute after tax. There are several rules for a cafeteria plan document, including that it must be in writing, describe who can participate, specify the available benefits, allow participants to change their HSA contribution elections at least monthly, and satisfy certain nondiscrimination requirements.
  2. Without a Cafeteria Plan: If you choose to make direct contributions to employees’ accounts without a cafeteria plan, comparability rules apply. Under the rules, you can divide your employees into three classes – full time, part time, and former – and offer different contribution levels to each class. But you must treat everyone in the class the same, meaning, either provide the same flat-dollar contribution or a contribution equal to a percentage of their deductible.

What are the 2023 HSA contribution limits?

Every year, the IRS sets a maximum amount that can be contributed to an HSA. The HSA contribution limits for 2023 are as follows:

  • Self-only coverage: $3,850
  • Family coverage: $7,750
  • Catch-up contribution for those 55 and up: $1,000

It’s important to note that HSA employer contributions count toward the IRS limits.

What is the deadline for making HSA contributions?

Generally speaking, contributions to an HSA are allowed up to the tax filing deadline. That means, for tax year 2022, contributions can be made until April 18, 2023.

Are HSA contributions taxable?

Your contributions to an employee’s HSA are not included in their gross income and are exempt from taxation; however, all employer contributions and pre-tax employee contributions must be reported in box 12 of the employee’s W-2.

There are some tax advantages to your business as well. First, since contributions are excluded from an employee’s income, that means you don’t have to pay your portion of payroll taxes on those amounts. In addition, your contributions to an employee’s HSA under a cafeteria plan are tax-deductible as a business expense.

What are my employer responsibilities for compliant HSA contributions?

In order for employees to reap the benefits of an HSA’s tax savings, both them and you must be in compliance with the rules in place. For example, if an employee or you contribute too much to an HSA, the worker will lose the tax benefits on the excess amount. And, they may also have to pay a 6% excise tax on the overage for each year that the excess contribution remains in their account.

Are contributions my only consideration to ensure compliance with HSA rules? 

While pre-tax benefits like health savings accounts can be a great way to enhance your package, making sure your HSA contributions are compliant is only one piece of the puzzle. There are other key administrative requirements you’ll need to keep in mind to avoid costly penalties such as creating plan documents, issuing notices, and performing nondiscrimination testing. Understanding your responsibilities when it comes to compliance with pre-tax benefits is critical in making sure you get them right.

Since there are several steps involved, you may have already realized you don’t have the resources or experience in house to handle these tasks. In that case, you may want to team with a third-party administrator to help. Read our next article on the top considerations when evaluating TPAs for your pre-tax benefit offerings.

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