4 things employers must do to keep current on HSA rules and regulations

A new year presents a golden opportunity to refresh employee benefit offerings. Out with the old and in with the new might be a tempting proposition, but it also would be a short-sighted one. If your clients aren't already offering health savings accounts (HSAs), here are some things to consider when you help them redesign their packages. 

HSAs are stronger than ever in 2024, 20 years after their creation. According to Devenir's semi-annual HSA survey, nearly 36 million people have saved $116 billion in their HSAs as of mid-2023. HSA assets are projected to grow to $151.3 billion in 2025, Devenir reported. 

There's a reason HSAs have become so popular. Employees can save money using their HSAs for current and future qualified medical expenses when paired with a high deductible health care plan (HDHP). HSAs also can help employers and employees save money on health insurance premiums, including premiums for qualified long-term care insurance. In addition, many HSA owners view their accounts as another retirement savings vehicle, which can help employers attract and retain employees who want to grow their retirement nest egg. 

Read more: Everything you need to know about health savings accounts 

It's easy to understand why employers like HSAs. They are the unicorn of the retirement industry, offering a triple tax-advantage for individuals and their families when they use it to pay for qualified medical expenses. For example, if an HSA contribution is made through an employer's cafeteria plan, the contribution can reduce an employee's taxable income for the year and certain employment taxes, i.e., Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA) and railroad retirement tax. 

Plus, employers can take a tax deduction for any contributions they make to their employees' HSAs. An HSA is portable, which means that if an employee leaves, he or she can take the HSA balance to his or her next employer. There's also less paperwork and hassle for the employer, and employees retain ownership of their HSA. 

Employees like HSAs because they can receive a tax deduction for contributions not made through a cafeteria plan, carry over their HSA assets from year to year (no use-it-or-lose-it rule), and withdraw HSA assets tax-free if they use the assets to pay for qualified medical expenses. 

Employees also can treat their HSA like a retirement account, letting their investments grow tax-deferred until retirement. While employees have control of their own HSAs, employers still have responsibilities, too. 

Read more: 4 ways SECURE 2.0 will impact retirement in 2024

Employers that contribute to their employees' HSAs have some responsibilities, including monitoring contributions, following rules associated with contributing to employees' HSAs, determining which financial organizations to work, with and meeting reporting requirements. Let's unpack each of these major areas.

1. Monitoring contributions. Employers must determine if their employees are HSA-eligible based on whether they are covered under the employer's HDHP (including if they have single or family coverage). An employer must also determine if its employees are covered under any other health plan sponsored by the employer that is not an HDHP (e.g., a health flexible spending account or a health reimbursement arrangement). If they are covered by any of the employer's non-HDHPs, then they will not be able to establish and fund an HSA. Employers also must track employees' ages to determine if they're eligible for catch-up contributions.

   Employers cannot monitor extraneous factors, so employees may have other coverage that would prevent them from being HSA-eligible (such as coverage under a spouse's general-purpose FSA). Employees must notify the employer when they are enrolled in other types of impermissible coverage.   

2. Contributing to employees' HSAs. Employers that offer HSAs don't have to contribute to their employees' HSAs. But if they do, they must make "comparable contributions" on behalf of all comparable participating employees during the calendar year. Specifically, they can't contribute different amounts — or different percentages of the health plan deductible — to different employees within the same health plan coverage category. Comparability rules can be complicated, particularly in complex business or work groups, so your employer clients should seek advice from business advisors or attorneys to make sure they are properly meeting these requirements. If a business doesn't satisfy the comparability rules within a calendar year, the employer could be subject to an excise tax equal to 35% of the aggregate amount that the employer contributed to its employees' HSAs for that year. If the employer can prove the failure to comply with the comparability rules was due to reasonable cause and not willful neglect, the IRS could waive all or a portion of that excise tax in certain situations. 

3. Determining which financial organizations to work with. An employer may limit the number of financial organizations that it will forward HSA contributions to through its payroll system. Some employers may allow their employees to open HSAs at any financial organization that offers them, while others may decide to work solely with one financial organization. An employer cannot, however, restrict employees from transferring their HSA assets to another financial organization if they so choose.

4. Meeting reporting requirements. An employer must report employer contribution amounts, including amounts deferred by an employee under the employer's cafeteria plan, on the employee's Form W-2, Wage and Tax Statement. Employers must enter code "W" in Box 12 to indicate that the dollar amount was contributed by the employer to an HSA. Financial organizations must report HSA contributions on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, and HSA distributions on Form 1099-SA, Distributions From an HSA, Archer MSA or Medicare Advantage MSA. 

When an employer offers HSAs to its employees, it unlocks access to another savings tool. An HSA program can be easy to offer and benefits everyone, especially for small businesses. For more information on HSAs, read IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.