There are many reasons to offer your employees benefits. The first being, it’s legally required in many cases. But beyond complying with state and federal employment law, offering employees benefits actually benefits employers if it’s done the right way.
If employers offer employees benefits that are impactful and cost-effective, that solve real needs employees have, they can enjoy returns on that investment that include: a healthier (and thus more productive) workforce, increased employee loyalty, higher talent retention and improved recruitment efforts. And if they offer a particularly popular benefit: the Health Savings Account (HSA), they can also enjoy the cost containment regarding their health insurance spend.
But it’s not enough to just offer popular benefits. Employers need employees to adopt and engage with these benefits in order to experience the positive changes we noted above. One way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.
What is employer matching?
Employer matching means that an employer develops a formula that it will use to determine how much it will contribute to employees’ accounts based on said employees’ contributions. Employers could choose to match employees’ HSA contributions dollar-for-dollar, dollar-for-dollar up to a certain amount, or a percentage of employee’s contributions up to a certain amount.
All Health Savings Accounts are subject to contribution limits, which are set each year by the IRS for individual and family accounts, so total contributions (employee plus employer) cannot exceed that annual limit.
How does it work?
If you’ve decided you want to match employees’ contributions to their HSAs, you must first determine how you want to do that (i.e. as part of a Section 125 plan or cafeteria plan or outside of a cafeteria plan). Then, determine your formula.
The pros of using a cafeteria plan to contribute include:
- Employees can make their contributions via a pretax payroll deduction. This will reduce your FICA tax burden.
- Contributions are not subject to comparability rules. These rules state that all employer contributions must be either the same dollar amount or the same percentage of the High Deductible Health Plan (HDHP) deductible. If employers fail this comparability test, then they could be subject to a 35% excise tax. They are subject to nondiscrimination rules, however.
If you are using a cafeteria plan to contribute to employees’ HSAs you must:
- Set up a cafeteria plan if you don’t already have one in place. Your cafeteria plan must allow employees to make pre tax salary reduction contributions to their HSA.
- Your matching formula must be crafted to comply with IRS nondiscrimination rules.
Once you’ve decided how you’re going to contribute to employees’ HSAs, determine either: the flat amount you’ll contribute (if you’re contributing outside of a Section 125 plan), or the matching formula that you feel will adequately benefit employees and incentivize them to contribute to their HSA, and fits within your budget (if you’re using a Section 125 plan). You can also choose to contribute a flat amount to all employees’ accounts via a cafeteria plan.
Then you must use this same formula for all employees who are eligible to contribute to their HSA. Just make sure your match doesn’t exceed IRS contribution limits for the applicable year. Then, at the start of your plan year, as each employee contributes, you match their contributions accordingly. For guidance in calculating an employee match, use our savings calculator.
How does it benefit employees?
An employer match of employee HSA contributions supports employees financially, physically and emotionally. An employer match supports employees financially because the employer is contributing “free money” to an employee’s account to help them pay for out-of-pocket qualified medical expenses. And since any unused funds roll over from year-to-year, the employer is also helping employees save for a medical rainy day and even retirement. Employer contributions are tax-free to employees.
Employer matching benefits employees physically because their contributions help ensure employees have the money to pay for medical treatment when they need it. This can help ensure employees get timely treatment (which keeps them healthier) and can afford the prescriptions and other health supports they need.
Employer matching benefits employees emotionally because it can help reduce the financial stress many feel when facing rising medical costs, chronic health issues and more.
How does it benefit my business?
There are many ways contributing to employees’ HSAs can benefit your business. In this section we’ll explore how making even small contributions to their accounts can reduce your business’s overall tax liability, help contain your health insurance spend, boost employee productivity, increase their loyalty, and help improve recruitment and retention efforts.
There are two ways employer matching of employees’ HSA contributions can reduce their overall tax burden. First, every dollar employers contribute to employees’ HSAs can be written off as a business expense. Second, and this the big one, every dollar employees contribute to their HSA reduces the employer’s FICA tax liability. By matching employee’s contributions, employers can incentivize employees to contribute more than they normally would, thus reducing their tax burden further.
To calculate how much you can save in FICA taxes when you contribute to your employees’ HSAs, use Lively’s Payroll Tax Savings calculator.
Contain your health insurance spend
Employees can only contribute to an HSA if they are actively enrolled in an HDHP and it’s their only health coverage. And since HDHPs are typically the most affordable of the health insurance plans from a premiums perspective, the more employees that are enrolled in the company’s HDHP, the lower its premium obligation is. But the high deductible can make employees nervous to take this health insurance option.
However, by offering employer contributions to employees’ HSA accounts alongside the HDHP plan, employers can incentivize employees to take this more affordable health insurance option because they have financial support toward that higher deductible.
Boost employees’ productivity
By financially supporting employees’ out-of-pocket costs, and by incentivizing employees to save more of their own money in their HSAs, employers can help to ensure employees have the money to pay for medical care when they need it. Employees that have the money to pay for care when they need it are more likely to get timely care, which means they are likely physically healthier and experience lower financial stress than employees that don’t have the means to pay for the care they need. Healthier employees (both from a physical and mental standpoint) are more productive employees.
Improve employee loyalty and retention
According to experts, employees feel more loyalty toward their employers if they feel like their employers value and are loyal to them. Employees want to feel cared about. They want to stay where they are supported. They want to stay where it makes financial sense to do so.
By matching employee HSA contributions, employers show they value their employees, they financially support employees’ physical and mental health, and they provide a financial benefit that can be more affordable than a simple salary increase but still contributes to employees’ household bottom lines.
Attract top talent
HSAs are among the fastest growing benefits in popularity. With all the attributes this type of account has, from saving for future medical needs (and even retirement) to the ability to invest your contributions, HSAs are a highly desirable benefit for incoming talent. In fact, in a survey of HR, Lively found that 79% say that HSAs are effective in attracting and retaining top talent. By offering employer matching, companies can show that they not only support the employees by giving them the benefits they want, but they will financially support them as well.
Get started today!
If you’re looking to uplevel your benefits offerings, including offering a best-in-class HSA that makes employer matching and administration easy, reach out today. Lively is your partner in providing your employees with the most supportive package that also fits within your budget. We make plan administration easy and effective, and we make HSA management streamlined and intuitive for account holders. We’re here to support employers and employees alike in building a better company and financial future.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.