The 3 Tax Benefits of Health Savings Accounts for Employers
- Lauren Hargrave
- 4 min read
A lot of literature has been written about the tax benefits of HSAs and High Deductible Health Plans (HDHPs) for employees. These include:
- Triple tax-advantaged contributions (they’re tax-free in the year they’re made, they grow tax free and distributions for qualified medical expenses are tax-free as well),
- Lower monthly premiums, and
- Lower tax bills.
But did you know these benefits also extend to employers? Not only does a company reduce the cost of their benefits with an HDHP/HSA combination, but the company itself receives tax benefits as well.
Decrease monthly premiums
It’s no secret that the high cost of offering company-sponsored health plans makes hiring new employees and paying for existing ones expensive. In fact, a recent survey showed that employers expect the cost of health premiums to rise 6% in 2023 after a 5% increase in 2022. And 455 of the survey respondents, who employ over 8 million people, expect their healthcare costs to be over budget this year.
One way to help reduce your healthcare budget (and your overall cost per employee) is to offer an HDHP/HSA combination. HDHPs typically have the lowest monthly premiums of the health plans, which lowers the employers’ financial burden, and their low monthly cost and ability to be paired with an HSA, makes them popular with employees. You can also offer an HSA contribution match that will help to make this benefit choice more popular. The more employees that choose an HDHP over a traditional health plan, the lower your cost and the more likely your health insurance costs will stay within budget.
Employee contributions to their HSAs are tax-deductible, but so are the contributions employers make. As an employer, you can structure your contributions as a set amount (i.e. each employee gets the same sum deposited into their account at the beginning of the year), or as a match.
Something to keep in mind when you’re structuring your contributions: HSAs have contribution limits that differ for those with individual and family plans, and are set annually by the IRS. This annual total includes contributions they make and those from their employer and anyone else that deposits money into their account. So work with your HR team and benefits professionals to determine the right level of contributions. You want to maximize the tax benefit to the company as well as the individual participant, but you also want to lower your benefits’ budget and encourage the employees to make their own contributions.
Save on FICA taxes
As an employer you pay payroll taxes on the same gross taxable income on which your employees must pay taxes. These are your FICA taxes. So anything that reduces your employees’ income tax burden, also reduces the payroll taxes you have to pay. Any contribution employees make to their HSAs is deducted from their gross pre-tax income, which means it’s also deducted from your FICA tax calculation. You can use our payroll tax calculator to see how much you can save on FICA taxes.
This is why it’s important to strategize with HR and your benefits professionals on the right amount of employer HSA contributions. You want to contribute enough that your participation acts as an incentive, but not too much so that employees don’t feel they need to contribute themselves and your benefits’ budget doesn’t see much improvement.
You can offer a benefit employees want
In addition to receiving three forms of tax savings by offering your employees an HSA, you will also have a great recruiting tool at your disposal. It’s still a tight labor market and qualified (let alone exceptional) talent is getting harder and harder to find. It’s also getting easier for other companies to poach talent as employee dissatisfaction remains high.
To keep the talent you have and recruit better people, you need to have something to offer your competitors don’t. A recent survey showed that after pay, good health benefits were the most important part of employees’ compensations. That might trigger you to think you must offer an all-encompassing health plan. But employees also want flexibility and personalization. An HDHP/HSA combination gives them the flexibility to use the money they save on their monthly premiums to pay for the procedures and care they need and want. Versus paying more monthly for coverage they don’t need.
As a bonus, HSAs double as a retirement benefit as they can be used in the same way as a traditional retirement account would be once the account owner reaches age 65. After age 65, distributions for qualified medical expenses remain tax-free and money used for anything else is subject to the appropriate income tax rate.
Get started with Lively today
Lively is your partner in putting together the best benefits package for your company. We offer live support, a clear and informative dashboard and take care of all employee onboarding and education. If you’re interested in offering your employees a benefit that will actually benefit them, reach out today.
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.