Section 125 Plan with HSA Module:
HSA Savings Can Be Pre-Taxed Through a Section 125 Plan with the HSA Module for extra tax savings
The Section 125 Plan with the $30 HSA Module from Core Documents allows both an employer and employee to realize additional savings by using pre-tax employee dollars to fund a Health Savings Account (HSA). Savings for the employer usually average between 7% and 10% over the Section 125 Plan alone. This additional savings comes from the employer’s matching Social Security (FICA), Federal Unemployment (FUTA), and often state unemployment tax dollars while employees save an additional 7.65% in FICA taxes.
However, this extra savings is lost to both the employer and the employee if the HSA savings is deducted directly from income on IRS Form 1040.
The HSA module is a $30 optional addition to the $99 standard Section 125 Plan. Let’s take a quick look at HSA’s and the Section 125 Plan HSA Module.
How Does an HSA Account Work?
An HSA is comprised of two parts:
- First, a qualifying High-Deductible Health Plan (HDHP) insurance policy covers regular medical and hospital bills.
- Then, the HSA complements the HDHP by allowing participants to withdraw tax-free funds for medical care not covered by the HDHP using pre-tax contributions made to an investment account, retirement account, or HSA bank account.
Unlike a Flexible Spending Account (FSA) which has an annual use-it-or-lose-it period, unused funds accumulate in the HSA bank or investment account earning tax-free interest until retirement, when it can be withdrawn for any purpose (and will be subject to normal income taxes).
HSA plans are personally owned by each participant or employee. Therefore, they go with an employee when they leave one job for employment elsewhere.
How Does an HSA Affect Section 125 Cafeteria Plans?
HSA Plans affect Section 125 Plans in two ways:
- 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 POP Document needs to be updated to accommodate the new benefit.
- 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 cannot have duplicate coverage that could pay expenses applicable to the HSA deductible.
Please Note: 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’ Section 125 Plan with HSA module documents are designed to accommodate these HSA options.
What Are the 2016 HSA & HDHP Contribution Limits?
The 2016 limits are listed below. Please note that these amounts will increase for the 2017 calendar year.
2016 HSA contribution limits:
2016 minimum annual deductible:
2016 maximum out-of-pocket amounts:
How Does the Participant Take the HSA Tax-Free Deduction?
There are two ways Participants can take the HSA deduction:
Year-End Tax Return HSA Deduction:
For the participant that will write-off HSA funds 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.
Deducting HSA savings through a Section 125 Plan with the 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 anywhere from 22.65% to about 40%, again depending on their tax bracket.
How Does the Employer Qualify for these Additional Savings?
An important fact often missed by CPAs, 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 (POP); however, greater savings can be achieved by modifying the standard plan with a Section 125 Plan HSA Module that allow the employee to pretax the 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.
The Section 125 Plan with HSA Module from Core Documents
Core Documents has developed a $30 HSA module for the $99 Section 125 POP that allows the HSA savings component to be pre-taxed. Employers receive everything they need to establish the full Section 125 Plan with HSA Module for only $129.00. Here is a list of what the plan documents package includes:
Resolution to Adopt,
Summary Plan Description,
Claim Forms, and
You’ve Ordered A Section 125 Plan Document with HSA Module, What Happens Next?
- The Section 125 plan with HSA Module plan document will be delivered signature-ready in either PDF format via email, or in a PDF via email AND in a printed 3-ring binder delivered via Priority Mail.
- Upon receipt, you (the employer) will:
- Sign the Section 125 Plan with HSA Module document in two place highlighted,
- Distribute the SPD to all employees, and
- Collect HSA election forms from employees participating in the plan.
- Your Section 125 Plan with HSA Module plan document does not need to be filed with any governmental entity; however,
- The HSA plan document does need to be held on site and made available in the event of an IRS audit or DOL inquiry, or if an employee requests to view the document.
- Funds for the Section 125 Plan with HSA Module can accumulate in the general asset account of the company until payment is due.
- An HSA trust account is not necessary.
- Discrimination testing and updating the Section 125 Plan HSA Module document will be required annually.
- Employee elections for premium and HSA savings do not get reported on the W2 at the end of the year.
As always, the knowledgeable and friendly team at Core Documents is available to assist you throughout the process:
Questions? Please Call Us Toll-Free at 1-888-755-3373
Or email CoreService@CoreDocuments.com
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.
All About HSAs – US Treasury Department, Washington, DC, February 1, 2005
IRS Notice 2004-2 – Questions and Answers regarding Health Savings Accounts
IRS Notice 2004-50 – Health Savings Accounts – Additional Q&A – Part III – Administrative, Procedural, and Miscellaneous
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Download the Core Documents Section 125 Cafeteria Plan Employer Guide HERE