Health savings accounts (HSAs) have existed for about 15 years. And they have grown in popularity. But many companies and individuals still don’t fully understand how they work. And what makes them a good health coverage solution for small businesses? Check out these 10 things to help you decide if HSAs are right for your business.
Health Savings Account Rules
1. HSAs depend on having HDHPs. So in order to obtain an HSA, you must possess a high-deductible health plan (HDHP). And each year, the IRS defines what this is. The following shows the HDHP requirements for 2019 and 2020:
| Type of coverage | Minimum annual deductible | Maximum out-of-pocket costs | ||
| 2019 | 2020 | 2019 | 2020 | |
| Self-only | $1,350 | $1,400 | $6,750 | $6,900 |
| Family coverage | $2,700 | $2,800 | $13,500 | $13,800 |
Generally, the HDHP must serve as your only health coverage. But the rules permit certain additional insurance. And these include vision, dental, long-term care, disability, specific illness or disease.
Other Things You Must Know about HSAs
2. Contributions are tax deductible. The party making the contributions — the business or the employee — gets the deduction. But deductible contributions also get capped annually. For 2019, officials have set $3,500 as the maximum amount for self-only coverage. And family coverage caps at $7,000 for family. The maximum self-only coverage for 2020 cps at $3,550. And family coverage caps at $7,100. When an employee reaches 55 or older they can add another $1,000. But spouses must have separate HSAs for both to make the additional contribution.
3. Contributions are exempt from employment taxes. If a business contributes to an employee’s HSA, the contribution is not subject to FICA or FUTA taxes.
Costs of HSAs
4. The cost of HSAs + HDHPs is lower than traditional health coverage. Businesses that want to provide medical coverage for their staff can do so more economically by combining HSAs with an HDHP than if they purchase traditional group coverage for their staff.
5. There’s no annual reporting by employers. Because an HDHP is an insured plan, the insurance company, and not the employer, provides employees with Form 1095-B. And because employees maintain their own accounts, the employer does not have to make annual reports about this employee benefit plan.
Other HSA Details
6. Excess contributions can be recouped. If an employer mistakenly contributes to an employee’s account (e.g., due to a payroll error), the excess contribution can be recouped by asking the financial institution to return it. Find more about mistaken contributions from the IRS. If excess employer contributions aren’t recovered by the end of the year in which they were made, they must be treated as taxable compensation which is reported on the employee’s Form W-2.
7. Distributions from HSAs for medical costs are tax free. As long as withdrawals are used to pay out-of-pocket medical costs, there is no tax on the distribution. There is no dollar limit on what can be withdrawn.
HSAs Give Employees a Say
8. Employees administer their own. It’s up to each employee to handle his or her own account; the employer does not have to oversee the account. For example, the employee must decide whether distributions are for qualified medical expenses (tax free) or other personal reasons (taxable).
9. Employees can use the account for non-medical reasons. Distributions for any reason other than paying a qualified medical expense are taxable. But distributions for non-qualified medical expenses are subject to a 20% penalty unless the account owner is at least 65 years old.
10. Employees build up retirement savings. If employees don’t need the funds in their account for medical or other purposes, they can allow the account to grow over time. There is no use-it-or-lose it feature. The account belongs to them, so there’s no loss when they change jobs or retire. Once an individual turns age 65, distributions for non-medical purposes can be taken penalty free, although these distributions are still taxable.
Conclusion
You can find more details about HSAs in IRS Publication 969.
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