$179 HSA Section 125 Plan Saves Employees & Employers More

Health Savings Accounts or HSA
HSA is an acronym for the Health Savings Account. An HSA is comprised of two parts. The first part is a high-deductible health plan (HDHP) insurance policy that covers regular medical and hospital bills. The second part of the HSA allows you to make tax-free contributions to an investment account, retirement account, or HSA bank account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw it for any purpose and pay normal income taxes.

HSA plans are personally owned by each participant or employee. Therefore they go with an employee when they leave one job and assume employment elsewhere.

How Does The Participant Take The HSA Tax-Free Deduction?
There are two ways Participants can take the HSA deduction:

1) Year End Tax Return HSA Deduction:
For the participant who will write-off their HSA bank savings amount from their annual tax return, tax-free means they only avoid paying federal income tax. They're still responsible for paying the 7.65% Medicare and Social Security taxes. This method saves the participant 15% to about 32% in federal tax write-offs depending on their tax bracket.

2) Deducting HSA savings through a Section 125 Plan with an HSA Module:
For HSA participants fortunate enough to have an employer with a Section 125 Plan modified to allow HSA deductions, tax-free means the participant avoids federal income tax and FICA taxes which include Medicare and Social Security. This method saves the employee 22.65% to about 40% depending on their tax bracket.

An important fact often missed by CPAs, Accountants, Payroll Companies, employers, insurance carriers and agents is how to pre-tax the HSA savings portion going into the investment or HSA bank account. This HSA savings piece can be pre-taxed through an employer's Section 125 Premium Only Plan. However, the standard Section 125 plan document should be modified or amended to allow the employee to pretax their HSA savings portion through convenient employee payroll deductions.

For Accountants, CPAs, Payroll Companies, and PEOs who need to validate this please see the high-lighted areas of the following IRS and Treasury documents: IRS Notice 2004-50 and All About HSAs printed by the US Department of the Treasury. Also, see the second question on the Employer Participation in HSAs Q & A page on the US Department of the Treasury website at: HSA Frequently Asked Questions.

Core Documents has developed a HSA module for the Section 125 Premium Only Plan that allows the HSA savings component to be pre-taxed. Employers receive everything they need to establish an HSA Section 125 for only $179.00. This package includes the Resolution to adopt, Plan Document, Summary Plan Description, Election Forms, Claim Forms, and Administrative Instructions. Core Documents is available to assist you throughout the process.

Employer Tax Savings:
By utilizing the Section 125 Premium Only Plan to pretax HSA savings the business owner saves matching Social Security (FICA), as well as federal unemployment taxes (FUTA) and generally, state unemployment taxes. Employer tax savings can average 7 to 10 percent more by utilizing the Section 125 Plan with the HSA module.

How does an HSA affect Section 125 Cafeteria Plans? HSA Plans affect Section 125 Plans in two ways:

A) The HSA savings component deposited into the investment or bank account can also be deducted through the Section 125 Premium Only Plan, however the Section 125 Premium Plan Document need to be updated to accomodate the new benefit.

B ) The HSA will also limit medical expenses that can be reimbursed by the Section 125 Health FSA. In order to maintain the tax-free status of the HSA savings account the IRS maintains that employees can not have duplicate coverage that could pay expenses applicable to the HSA deductible. However HSA participates who also participate in a Section 125 FSA can have a "Limited Purpose Health FSA” plan that will only pay for dental, vision and preventive care expenses, or a “Post Deductible Health FSA” which will only pay benefits after the HSA deductible has been satisfied. Core Documents' plans are designed to accomodate these HSA options.

You’ve Oredred A Section 125 Plan Document with HSA Module, What Happens Next?

Questions? Please Call Us Toll-Free at 1-888-755-3373
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HSA Road Rules for Employers and Employees from The HSA Coalition by Dan Perrin, January 2007, 5th Edition.

An Overview of Health Savings Accounts (HSAs) with Comparison to Archer MSAs, Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) , by Miller & Chevalier Chartered.

IRS Notice 2004-50 - Health Savings Accounts - Additional Q&A - Part III - Administrative, Procedural, and Miscellaneous