The Affordable Care Act (ACA) changed the landscape for small businesses that offered health benefits for their employees.
Before the ACA, many small businesses reimbursed some or all of their employees’ individually purchased health insurance.
The ACA makes that illegal and imposes a $100-a-day, per-employee penalty for such reimbursements without using one of the newer health reimbursement accounts—namely the ICHRA or the QSEHRA.
That brings us to two other choices:
- As a small employer with fewer than 50 employees, you can offer no health benefits and face no federal law penalties.
- You can use the health savings account (HSA) to help employees with their health benefits without facing the hurdles of the ACA.
But here’s the kicker: The one thing you need to consider when you make the HSA contributions is the discrimination rules (which are called “comparability” rules in the HSA world). If you violate these rules, the IRS forces you to pay a draconian tax of 35 percent of your total HSA contributions.
Fortunately, it’s easy to avoid discrimination—even when you favor one group of employees over another—when you follow three simple rules.
What Employers Must Know
Before we get to the three simple rules, the general rule to know as an employer is that you have to make “comparable” contributions to all employees who have a high-deductible health plan (HDHP). (Employees are not eligible for HSA contributions unless they have an HDHP.)
What if some employees have an HDHP and some don’t? You don’t have to give any benefit to the non-HDHP employees. For purposes of HSA tax law, you can simply give them nothing and ignore them.
But for your HDHP employees, you have to make comparable contributions. You do that by following the three rules below.
Rule 1—Determine the Categories of Your HDHP Employees
You have to make comparable contributions only to employees who are in the same “category.”
For two or more employees to fall into the same category, they must have identical answers to both of the following questions:
- Is the employee a full-time, part-time, or former employee?
- How many dependents are covered under the employee’s HDHP?
Full time versus part time. Part-time employees are those working fewer than 30 hours per week, and full-time employees are those working 30 hours or more per week.
Number of dependents covered. The HSA rules provide four options:
- Self-only HDHP
- Family HDHP covering the employee plus one dependent (“self plus one”)
- Family HDHP covering the employee plus two dependents (“self plus two”)
- Family HDHP covering the employee plus three or more dependents (“self plus three or more”)
Example 1. You have three full-time employees:
- Sam has a self-only plan.
- Joe has a family plan covering himself and his son.
- Kim has a family plan covering herself and her husband.
Only Joe and Kim are in the same category, because they both have self-plus-one HDHP coverage. Sam is in a different category, because he has coverage for himself only.
Example 2. In addition to the three employees above, you have a part-time employee named Barbara who has a family plan covering herself and her husband. Barbara is in a category separate from Joe and Kim. Even though she has self-plus-one coverage, she is part time, whereas Joe and Kim are full time.
Rule 2—Calculate a Comparable Amount
Contributions are comparable if you give each employee in the same category either
- the same amount of money, or
- the same percentage of the plan’s deductible.
You make this determination each month.
Example. At the beginning of the year you have two employees, and you hire a new employee who begins work on May 1. All three employees have the same HDHP.
You decide to contribute $100 per month to each employee’s HSA. For the two employees who are with you for the full year, you contribute $1,200 total to each of their HSAs. For the new employee, you contribute a total of $800, since that employee worked only eight months of the year.
Rule 3—Treat Yourself Differently
Unless you operate your business as a C corporation, tax law does not treat you as a normal employee with regard to the contributions your business makes to your personal HSA.
If you’re a sole proprietor, you simply take the deduction on your Form 1040.
If you operate as an S corporation, you treat the S corporation contribution as compensation, and then you take the deduction on your Form 1040.
For 2023, you can contribute a maximum of $3,850 to a self-only plan, $7,750 to a family plan, and an additional $1,000 for individuals over age 55.
If you want to discuss the HSA plan for you and your employees, please contact us today!