What Is the Tax Liability for Employer HSA Contributions?
Clarify the tax liability of employer HSA contributions for both employees and businesses. Understand reporting requirements.
A Health Savings Account (HSA) provides a tax-advantaged way for individuals to save for qualified medical expenses. These accounts work with a High-Deductible Health Plan (HDHP), which typically features lower monthly premiums but higher deductibles. An HSA allows for tax-free contributions, earnings, and withdrawals for qualified medical expenses, offering a triple tax advantage. Employers can also contribute to these accounts on behalf of their employees.
Employee Tax Implications
Employer contributions to an employee’s Health Savings Account are excluded from the employee’s gross income for federal income tax purposes. This exclusion generally applies to state income taxes, though state laws vary.
Employer HSA contributions are also exempt from Federal Insurance Contributions Act (FICA) taxes, which include Social Security and Medicare taxes. This exemption provides an additional tax saving for employees, as these payroll taxes are usually deducted from their wages. If an employee contributes to their HSA through a Section 125 cafeteria plan, these pre-tax payroll deductions are also considered employer contributions and receive the same FICA tax exemption.
If an employee makes direct, after-tax contributions to their HSA, these are not subject to FICA taxes and can be deducted on their individual income tax return. The total amount contributed to an HSA, including both employer and employee contributions, cannot exceed annual IRS limits. Exceeding these limits can result in excess contributions being subject to taxes and an additional excise tax.
Employer Tax Deductions and Obligations
Employer contributions to employee Health Savings Accounts are tax-deductible as a business expense. Employers also realize significant savings on payroll taxes.
Employer contributions to HSAs are exempt from the employer’s share of FICA taxes, which total 7.65% (6.2% for Social Security and 1.45% for Medicare). This exemption applies to direct employer contributions and employee contributions made through a pre-tax Section 125 cafeteria plan.
Employers are not legally required to contribute to employee HSAs, but if they choose to do so, certain comparability rules apply. These rules require contributions to be comparable for all eligible employees with the same category of coverage. Failure to comply can result in an excise tax equal to 35% of the aggregate contributions. Contributions made through a Section 125 cafeteria plan are subject to its nondiscrimination rules, which may offer more flexibility.
How Contributions Are Reported
Employer contributions to Health Savings Accounts are reported on the employee’s Form W-2, Wage and Tax Statement. Specifically, the total amount of employer contributions, including any pre-tax employee contributions made through a Section 125 cafeteria plan, is reported in Box 12 of Form W-2 with Code W. This aggregated amount reflects all contributions made to the employee’s HSA via payroll.
This reporting on Form W-2 serves as an informational record for the employee and the IRS. Employees who receive HSA contributions, whether from their employer or directly, must file Form 8889 with their federal income tax return.
Form 8889 is used to report all HSA activity, including employer and employee contributions, and any distributions. Information from Form W-2, Box 12, Code W, is transferred to Form 8889 to reconcile total contributions for the tax year. Financial institutions that administer HSAs also issue Form 5498-SA to report contributions, which is an informational form for the account holder.