HSA Savings Component Can Be Pre-Taxed Through a Section 125 Premium Only Plan
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. Employees also save an additional 7.65% in FICA taxes by pretaxing HSA savings through a Section 125 Premium Only Plan. This extra savings is lost to the employer and the employee if the HSA savings is just deducted from the employees gross income on IRS Form 1040. But first let’s review the 2013 current HSA plan basics.
2013 Contribution and Out-of-Pocket Limits for Health Savings Accounts and for High-Deductible Health Plans
In Revenue Procedure 2012-26, issued on April 27, 2012, the IRS provided the inflation-adjusted HSA contribution and HDHP minimum deductible and out-of-pocket limits for 2013. The higher rates reflect the cost-of-living adjustment and rounding rules of Internal Revenue Code section 223.
2013 HSA contribution limit (employer + employee) Individual: $3,250 Family: $6,450
2013 HSA catch-up contributions (age 55 or older)* $1,000
2013 HDHP minimum deductible amounts Individual: $1,250 Family: $2,500
2013 HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums)
Individual: $6,250 Family: $12,500
* Catch-up contributions can be made any time during the year in which the HSA participant turns 55.
** Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.
2013 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 qualifying 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 can accumulate 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.
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 Ordered A Section 125 Plan Document with HSA Module, What Happens Next?
- The Section 125 plan document with HSA Module plan document will be delivered signature-ready in a one inch-ring bound notebook.
- Sign the HSA document in two place highlighted, distribute the SPD to all employees, and
- collect HSA election forms from employees participating in the plan
- HSA plan document does not need to be filed with any governmental entity
- HSA plan document needs to be 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 w/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 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.
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HSA Resource Material
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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