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Employer HSA Contributions

By Brian Gilmore | Published November 6, 2020

Question: What are the main rules that apply to employer HSA contributions?

Short Answer: While employers have broad discretion in designing an employer HSA contribution strategy, they should be aware of five main considerations detailed below.

Employer HSA Contribution Consideration #1: Applied to Contribution Limit

Both employer and employee HSA contributions apply toward the statutory maximum contribution limit. Contributions from any source, including both employer and employee contributions through payroll, count toward the same aggregated limit.

In other words, the HSA contribution limit is different from the 401(k) contribution rules, which have separate deferral (§402(g)) and aggregate employer annual additions (§415(c)) contribution limits. No similar concept applies to HSA contributions—there is simply one unified annual HSA contribution limit.

The HSA contribution limits are adjusted annually for inflation, currently at the following levels:

2020 Contribution Limits:

• Individual HDHP Coverage: $3,550
• Family HDHP Coverage: $7,100

2021 Contribution Limits:

• Individual HDHP Coverage: $3,600
• Family HDHP Coverage: $7,200

Family HDHP coverage includes the employee plus at least one other individual (e.g., spouse, domestic partner, child(ren)).

Additional Notes:

• A $1,000 catch-up contribution is available for individuals who are at least age 55 by the end of the calendar year. For more details, see our previous post: HSA Catch-Up Contributions.
• For more details on the other HDHP/HSA annual limits, see our Compliance Alert: IRS Releases 2021 Inflation Adjusted Amounts for HSAs.

Employer HSA Contribution Consideration #2: HSA Contribution Interval Set at Employer’s Discretion

Employers may make one up-front lump sum contribution, semiannual contributions, quarterly contributions, monthly contributions, per-pay period contributions, or any other regular interval in between. The employer has full discretion in designing its HSA contribution strategy.

Main Advantages of More Up-Front Funding:

• Avoids employees not having sufficient funds in their HSA early in the plan year to cover the deductible or other out-of-pocket expenses; and
• Entices more employees to enroll in the HDHP because of the confidence in having funds available for expenses incurred early in the plan year.

Main Disadvantages of More Up-Front Funding:

• Nonforfeitable contributions means no ability to claw back contributions if an employee terminates or changes plans mid-year (potentially resulting in an employee windfall); and
• Can result in contributions in excess of the proportional contribution limit for a partial year of HSA eligibility if the employee loses HSA eligibility mid-year.

Additional Notes:

• For more details on the nonforfeitable status of employer HSA contributions, including three limited exceptions for mistaken contributions, see our previous post: HSA Mistaken Contributions.
• For more details on the contribution limit that applies for a partial year of HSA eligibility, and the potential for excess contributions with up-front funding, see our previous post: The HSA Proportional Contribution Limit.
• Where employees enroll in the HDHP or change HDHP coverage tiers mid-year, employer policy will also determine whether to prorate employer HSA contributions for the remainder of the plan year. Not prorating creates the same potential for excess contributions as with up-front funding.

Employer HSA Contribution Consideration #3: Included in Form W-2 Reporting

Employers must report all employer and employee HSA contributions made through payroll as a single aggregated amount on the employee’s Form W-2 in Box 12 using code W.

This reporting includes the employer contribution amount and the amounts contributed by employees pre-tax through payroll (via the Section 125 cafeteria plan).

Example:

• Kyle is HSA-eligible with family HDHP coverage for all of 2020.
• Kyle’s employer contributes $3,000 to his HSA in 2020.
• Kyle contributes $4,100 to his HSA on a pre-tax basis through his employer’s Section 125 cafeteria plan in 2020.

Result:

• The employer must report both the employer and employee HSA contributions as a single aggregated amount in Box 12 using Code W.
• Box 12 of Kyle’s 2020 Form W-2 will show $7,100 in combined employer/employee HSA contributions with Code W.

Additional Notes:

• For more details on W-2 reporting, including prior-year contribution corrections, see our previous post: HSA Form W-2 Reporting.
• California and New Jersey do not conform the federal tax-advantaged treatment of HSAs. For more details, see our previous post: California and New Jersey HSA State Income Tax.

Employer HSA Contribution Consideration #4: Limited Role in Determining HSA Eligibility

HSA eligibility is generally an individual income tax issue that does not involve the employer. Therefore, with limited exceptions, the employer is not responsible for determining the HSA-eligible status of employees.

Employers are responsible for confirming only the following three items with respect to an employee’s HSA eligibility:

• Whether the employee is covered by an HDHP sponsored by that employer;
• Whether the employee has any disqualifying coverage sponsored by that employer; and
• The employee’s age for determining eligibility for catch-up contributions.

Employers may rely on employees’ representations as to their date of birth.

Most importantly, employers are not responsible for determining or monitoring whether employees have any outside disqualifying coverage.

Additional Notes:

• For more details on how a spouse’s general purpose health FSA enrollment is disqualifying coverage for both the employee and spouse, see our previous post: Health FSA Interaction with HSA.
• For more details on how Medicare enrollment (but not mere eligibility!) is disqualifying coverage, see our previous post: How Medicare Affects HSA Eligibility.

Employer HSA Contribution Consideration #5: Section 125 Nondiscrimination Rules Typically Apply

Employer HSA contributions are subject to one of two sets of nondiscrimination rules:

• The comparability rules of IRC §4980G; or
• The cafeteria plan nondiscrimination rules for IRC §125.

Where employees are permitted to contribute to the HSA through payroll on a pre-tax basis via the company’s cafeteria plan, the employer’s contributions are not subject to the comparability rules.

Additional Notes:

• For more details on the interaction between the comparability rules and the Section 125 nondiscrimination rules, see our previous post: HSA Nondiscrimination Rules.

The Author

Brian Gilmore

Lead Benefits Counsel, VP, Newfront Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.