Employer Contributions to HSA Rules: What You Need to Know

Health Savings Accounts (HSAs) offer a tax-advantaged way for employees to save for medical expenses, and employer contributions can enhance these benefits. However, employers must follow IRS regulations when making contributions. Failure to comply can lead to penalties or financial consequences. Understanding the rules around contribution limits, adjustments, and excess amounts is essential for both employers and employees.

Comparability Requirements

Employers contributing to HSAs must follow IRS comparability rules under Section 4980G of the Internal Revenue Code. Contributions must be uniform for employees in the same category, meaning they cannot vary based on tenure, job performance, or salary. Instead, they must be the same for all employees with the same level of health plan coverage, such as self-only or family coverage.

The IRS allows differentiation based on three categories: self-only coverage, family coverage, and an intermediate tier such as employee-plus-one. While contributions can vary between these groups, all employees within a category must receive the same dollar amount. If an employer contributes $1,000 to one full-time employee with self-only coverage, every other full-time employee with self-only coverage must receive the same amount.

Non-compliance results in an excise tax of 35% on the total HSA contributions made during the year. This penalty applies to the employer, making it essential to structure contributions correctly.

Contribution Limit Compliance

Employers must ensure contributions do not exceed IRS-imposed annual limits. For 2024, the maximum HSA contribution is $4,150 for individuals with self-only high-deductible health plan (HDHP) coverage and $8,300 for those with family coverage. Employees 55 or older can contribute an additional $1,000 as a catch-up contribution, but this extra amount must come from the employee.

Because HSAs are employee-owned, employer contributions count toward the total annual limit. If an employer contributes $2,000, the employee can only contribute the remaining allowable amount. Employers should monitor contributions carefully, especially when employees make their own deposits, to prevent exceeding the limit.

Payroll systems and benefits administrators play a key role in tracking contributions. Automated payroll deductions that cap contributions based on remaining allowable amounts can help prevent errors. Employers should also educate employees on their individual limits to avoid unintended tax consequences.

Adjusting Contributions for Mid-Year Coverage Changes

When an employee’s health plan coverage changes mid-year due to a qualifying life event or a switch in plan type, employer contributions may need adjustment. The IRS allows prorated contributions based on the number of months an employee is HSA-eligible. For example, if an employee moves from self-only to family coverage on July 1, their contribution limit is recalculated based on six months at the individual limit and six months at the family limit.

Employers must also consider the “last-month rule,” which allows employees with HSA-eligible coverage as of December 1 to contribute the full annual limit for that coverage type, regardless of when they enrolled. However, they must maintain HSA-eligible coverage through the entire following year. If they lose eligibility before the year ends, excess contributions from the last-month rule become taxable and subject to a 10% penalty. Employees should be informed about this requirement to prevent unexpected tax liabilities.

If an employee leaves mid-year, employer contributions typically stop, but deposited amounts remain in the employee’s HSA. Some employers contribute per pay period to avoid overfunding in case of early termination. Those offering lump-sum contributions at the start of the year should have policies in place to address situations where an employee departs before year-end, as reclaiming funds is generally not allowed.

Handling Excess Contributions

Excess contributions occur when employer and employee deposits combined exceed the IRS annual limit. This can result from payroll miscalculations, misunderstandings about eligibility, or errors in tracking contributions across multiple jobs. Any contributions above the limit are considered taxable income for the employee and, if not corrected, incur a 6% excise tax for each year the excess remains in the account.

To correct an overcontribution, the employee must withdraw the excess funds before the tax filing deadline, including any earnings generated. The withdrawn amount is reported as income for that tax year, but the 6% penalty is avoided. If the excess remains in the HSA past the deadline, it continues to incur the excise tax annually until removed.

Employers cannot unilaterally reclaim mistaken contributions once deposited. The employee must take action to correct the issue.

Potential Penalties

Failing to comply with HSA contribution rules can lead to financial penalties for employers. Violating comparability rules by making unequal contributions within the same coverage category results in a 35% excise tax on the total amount contributed during the year. This penalty applies to the employer and is separate from any corrective actions taken.

If excess contributions are not properly handled, the employee faces a 6% excise tax for each year the excess remains in the account. Employers should have internal controls in place, such as regular audits and automated payroll systems, to prevent errors.

If an employer mistakenly contributes to an ineligible employee’s HSA—such as one enrolled in a non-HDHP plan—the IRS does not provide a formal correction mechanism for reclaiming those funds. The employer must work with the employee to voluntarily return the contribution, or the amount remains in the HSA and is treated as taxable income for the employee. To avoid these issues, employers should verify eligibility before making contributions and clearly communicate HSA requirements to employees.