Health Savings Accounts Work For Small Businesses

Health Savings Accounts Work For Small Businesses

Health savings accounts are well known for making medical expenses tax deductible and for helping people create savings for retirement with tax-free interest, similar to an IRA. Increasingly, health savings accounts are becoming more popular with both employers and employees.Here's what providing your employees with health savings account (HSA) benefits can mean for your business and your employees: Low Administrative Costs Health savings accounts help your business avoid costly administrative expenses because your employees basically administer their own accounts. They can manage how their funds are invested and decide when to make withdrawals. They can even make personal deposits into their HSA. Your business will also have few contribution requirements to meet. You can deposit a lump sum just one time, or make multiple deposits, when most convenient depending on cash flow. Benefits For EmployeesOffering HSA benefits is a low-cost way to make your company more attractive and can help you retain employees. That helps you save on training costs, can improve customer service, and typically increases sales revenue.Your employees' HSA earnings are not taxable as long as the funds remain in their accounts, and their balances can grow faster by earning tax-free interest. There's an incentive to hold onto those retirement funds, which can motivate employees to protect their health so they don't have to withdraw money to pay for health care. That, in turn, can help reduce sick days and increase productivity. HSA funds are also attractive to employees because the employees own their accounts. These portable accounts are theirs to keep if they lose a job, change jobs or retire early. Any account funds that aren't withdrawn simply roll over at the end of each year to continue building a "nest egg."HSA Contribution RequirementsWhile there's no minimum contribution requirement, there are maximum contribution limits. You must stay below the legal annual contribution limit, which depends on the year in question. In addition, employer contributions to different employee health savings accounts must be "comparable." That means deposits must be in the same dollar amount or the same percentage of employees' deductibles for those employees with the same category of coverage. Typically, coverage categories are either going to be "self-only" for individuals or "family." Employer contributions can vary depending on whether the employee's status is full-time or part-time. When employees are covered by a collective bargaining agreement that includes health benefits, comparability rules don't apply.Requirements for Partnerships, Section 125 Plans And S CorpsWhat if your company offers benefits through a Section 125 plan? Such salary reduction or cafeteria plans must comply with different rules. With Section 125 plans, contributions from either the employer or the employee have to follow "non-discrimination" rules. That means the employer has to be sure that contributions don't favor employees with higher compensations. There are also restrictions on HSA contributions with respect to owners and shareholders of S corps. Owners and officers who have more than a two-percent share of a Subchapter S corporation may not make pre-tax contributions to an HSA through the company by salary reduction.Any contribution made to their HSA from the corporation is considered a taxable form of income. They may, however, deposit personal contributions into their HSA and take an "above-the-line" deduction on their personal income taxes. Partners in an LLC or partnership have to comply with similar restrictions. They cannot make pre-tax contributions to their HSA through the partnership by salary reduction. Like the owners and officers, partners may deposit personal funds into their HSA and take an "above-the-line" deduction on their personal income taxes.

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