Small business owners are always looking for ways to maximize benefits while minimizing cost for both themselves and their employees. A small business HSA is a perfect way to limit healthcare costs while ensuring you have the dedicated money you need to pay for medical costs. What you might not know is that your company legal structure, and ownership stake, might impact your HSA contributions.
SMB Ownership and HSA Eligibility
Before we dive into the corporate structure and the impact it has on your HSA-eligibility, employees must meet all of the standard HSA-eligibility requirements including an HSA-eligible health plan. You can read all of the HSA-eligibility requirement details here.
HSA Corporate Structure Qualification Requirements
- C-Corp: A Section 125 plan is required to fund pre-tax benefits (including HSA contributions). All employees of the c-corp (shareholder or not) can participate in the plan. If a Section 125 plan is not in place, then contributions can still be made, however it must be post-tax dollars are subject to comparability rules per IRS Section 223.
- S-Corp: Please be aware that any owner who owns >2% is ineligible to receive pre-tax contributions. Anyone in this designation is considered an “owner” from an IRS perspective as such must receive HSA contributions on a post-tax basis and receive the tax benefit at the end of the year.
- Partnerships (e.g., LLC / LLP): Partnerships must be taxed as a corporation to make pre-tax contributions. If the partnership is not taxed as a corporation and it has employees, then it can implement a Section 125 plan and allow for employee contributions on a pre-tax basis but the owners of the partnership would not be allowed to participate in the plan (on a pre-tax basis).
- Sole Proprietorship: Sole proprietors cannot make pre-tax contributions into their own HSA account. If the sole proprietorship has employees, then they can implement a Section 125 plan and allow for employee contributions on a pre-tax basis but the sole proprietor would not be allowed to participate in the plan (on a pre-tax basis).
Wait! Even if your company legal or ownership structure will not allow for you to make pre-tax HSA contributions, you can make post-tax HSA contributions. From there, you can use those HSA contributions to reduce your yearly income tax liability. So rather than getting the tax benefit on a paycheck by paycheck basis, you will receive the tax benefit at the end of the year when you file your taxes.
What is a Section 125 Plan?
A Section 125 Cafeteria Plan is a written document maintained by an employer where the participants of the plan can receive benefits on a pre-tax basis via salary reduction.
Eligible benefits plans include Premium-Only Plans (POP), Flexible Spending Account (FSA), Healthcare Reimbursement Account (HRA), Dependent Reimbursement Accounts (DRA) and of course a Health Savings Account (HSA).
How does a Section 125 Plan affect my HSA contributions?
A Section 125 Plan sets the rules and regulations for pre-tax contributions for employee and employer HSA plans via pre-tax salary deductions.
Can I Contribute to an HSA without a Section 125 Plan?
Yes! Yes! Yes! Employers can still contribute to an HSA without a Section 125 Plan. Employers can make post-tax one-time or recurring contributions directly into their employees’ HSA accounts.
You likely didn’t consider HSA contribution requirements when you were setting up your corporate structure. Don’t worry. Understanding your corporate structure and how that impacts your pre-tax HSA contributions eligibility will help you stay IRS compliant. The good news is, no matter your corporate structure or ownership position you can still make HSA contributions, as long as you qualify the standard HSA health plan requirements.
None of the above is intended to be tax advice. Please be sure to consult with a tax professional.
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.