Health Savings Account Blog

Deflecting the tax bite

When a company pays a worker a $1,000 bonus, it costs the employer $1,100 to $1,200 because of payroll and associated taxes. Moreover, the money is supplemental income, which is withheld at the highest marginal tax rate, so the employee will only see about $500 or $600 of the bonus. This takes away the motivational impact of the bonus, Ripperger says.

However, if an employer puts the $1,000 in a Health Savings Account, which is not subject to Federal Insurance Contribution Act, or FICA, and Federal Unemployment Tax Act (FUTA) taxes; it's treated just like a premium for tax purposes. That is, $1,000 costs the employer $1,000. The money is not imputed income to the employee if used on medical expenses, so the worker gets the full $1,000.

Ripperger, who specializes in consumer-driven health care and HSAs, admits some of his clients are using the approach implicitly rather than explicitly. That is, they are thinking about how the business is operating as they determine next year's HSA contributions. "And that's okay, but what I really want to encourage them to do is get more explicit and put some formality around it," he says.

The approach really works the cleanest with small and midsize companies because they can easily move all of their employees to a high-deductible plan with a HSA combination.

It's a little less of a prefect fit if you have 10% of your employees in a high-deductible plan with a HSA. That doesn't mean a profit-sharing model for contributing to employees' HSAs can't work; it still can, Ripperger says. It just means it will work better on a full replacement basis.

Likewise, "it's important that the employer contribution to the HSA be determined and communicated prior to open enrollment so individuals can maximize their tax-advantaged savings. Remember, employees can contribute to the HSA as well as the employer, providing additional tax savings," Ripperger observes. "We are not asking to replace any current profit-sharing plans that an employer has in place. We are merely asking them to take some of the tenets that they use and apply them to funding part of their heath care plan."

Ripperger believes by offering cash bonuses as HSA contributions, employers can start to address the magnitude of health care cost, particularly if the measure can get workers better engaged in making decisions about their health and health care.

"We can examine the health care cost by closely aligning it to organizational goals by using tools such as a profit-sharing approach," he adds.

Other funding options

Recently, the Internal Revenue Service offered more guidance on HSAs, and "now we are seeing some pretty good flexibility in offering non-comparable contributions," says Alexander C. Domaszewicz, a senior consultant at Mercer Health and Benefits in California. He agrees that some employers might see this as opportunity for a profit-sharing program based on funding HSAs on corporate performance.

Under current laws, employers are penalized with a 35% excise tax for failing to make a comparable contribution to the HSAs of its employees during a calendar year. Consequently, "we saw a little bit of a freeze on folks being too aggressive in how they interpreted the law and trying to do too much around individual performance bonus and HSAs," says Domaszewicz.

Now, policymakers have opened the door for employers to be creative with funding HSAs and cafeteria plans.

"For example, if you run your HSA contributions from the company to the employee through your Section 125 cafeteria plan, which includes being able to allow for payroll reductions, then you are able to avoid comparable contribution requirements because you are then subject to the ERISA rules and nondiscriminatory rules through your 125 plan," says Domaszewicz.

But organizations seeking to reward workers through HSAs should make sure they fully understand the laws and regulations on employer HSA contributions.

"If it's cash, then you have to put money into a HSA in a way that meets the comparable rules, and that means either the same percent of the deductible or the same dollar amount," says Scott Keyes, a health benefits consultant at Watson Wyatt in Stamford, Conn.

So, for example, "[If] I get $100 and you get $1,000 dollars, that means you have $900 dollars more in a HSA. That's going to violate the rules," Keyes point outs.

However, employers can get around those rules by permitting the employee to defer the bonus and put it into a HSA at a later time. Bear in mind, though, a worker with a $1,500 high-deductible health plan who already has $1,000 in a HSA can only put in $500 more for that year. Therefore, if you receive a $1,000 bonus, you can only put $500 in the account. - L.C.B.

Learn more about HSAs at: http://www.health--savings--accounts.com