Tax Season Tips for Your Employees: The Advantages of HSAs

Tax season is in full swing, but it’s not too late for your employees to reap the benefits of a health savings account (HSA). With an HSA, employees can set aside tax-free money to pay for qualified healthcare expenses, as long as the employee is enrolled in an HSA-compatible health insurance plan.

HSAs don’t just benefit employees; they also help employers compete for top talent and reduce their own tax burdens. As the filing deadline approaches, now is the time for your business and employees to take advantage of these tax-advantaged savings accounts. Explore the benefits of HSAs below, as well as key considerations for the 2023 and 2024 tax years.

Lower taxable income with an HSA

Employees can use an HSA to lower their taxable income—and it’s not too late to open an account for the 2023 tax year. Employees have until April 15, 2024, to create an HSA and add funds. Any unspent funds roll over from year to year and they also remain available to employees should they change jobs.

If your employees are making last-minute contributions, you may want to remind them to tell the HSA administrator that their contributions are for the 2023 tax year, not 2024. It’s also advisable to remind them of the 2023 IRS contribution limits to avoid penalties. For the 2023 and 2024 tax years, employees and employers can contribute the following combined amounts, with limit increases for the 2024 tax year.

  • Self-only contribution limit for 2023 tax tear: $3,850 
  • Self-only contribution limit for 2024 tax year: $4,150 
  • Family contribution limit for 2023 tax year: $7,750 
  • Family contribution limit for 2024 tax year: $8,300 

Employees 55 and older can contribute an additional $1,000 to either single or family plans. This catch-up contribution can help employees prepare for the potentially higher medical expenses they’ll experience in retirement.

If combined employer and employee contributions exceed these annual limits, employees may incur a 6% penalty until the employee removes the excess contribution. They have until the April 15 deadline to correct any errors, but will need to make an "excess contribution removal" request with their HSA administrator to ensure accurate tax reporting.

Another important caveat: if the employee did not have an HSA account open with a balance sometime in the previous 18 months, they cannot use that money to pay medical expenses incurred before the account was opened on a tax qualified basis, but they can use those funds for future expenses.

Easily report HSA contributions and expenses

First American Bank Health Account Services is here to help with all your HSA account needs. As an HSA administrator, we automatically generate the forms your employees will need to file their tax returns, including:

  • IRS Form 5498-SA to report contributions 
  • Form 1099-SA to report distributions taken out of the HSA 

Your employees will also report their HSA contributions and distributions on IRS Form 8889.

While neither the IRS nor First American Bank requires receipts for withdrawals, we recommend that your employees keep them, should they ever be audited. We also advise that employees should be watchful of making erroneous expenditures. If employees spend their HSA funds on non-qualifying expenses, those funds can be taxed as income. What’s more, if they’re under 65 years old, the non-qualifying expenses will also result in a 20% penalty. To help them avoid these added costs, we recommend sharing IRS Publication 502 with your employees for guidance on qualifying expenses.

HSAs benefit employers, too

HSAs don’t just help your employees lower their taxable income, they can also benefit you as an employer. HSAs can:

  • Enhance your benefits package. Offering HSAs to your employees improves your benefits package, making your company a more desirable place to work.
  • Reduce your health plan premiums. Only employees enrolled in qualifying high-deductible health plans (HDHP) are eligible to contribute to an HSA. These plans typically offer lower premiums for employees and employers. With the money you save, you can contribute to employee HSAs or reinvest in your business.
  • Lower payroll costs. You can deduct the contributions you make to employee HSAs as a business expense, reducing your company’s overall tax burden.
  • Reduce tax burden even further. Employers get further tax savings when employees make their HSA pre-tax contributions through a Section 125 Cafeteria Plan.

If your company does not offer an HSA compatible high-deductible health plan, you might consider a Flexible Spending Account (FSA) as an alternative. Employees enrolled in an FSA reduce their taxable income and enhance their healthcare coverage. Call our Heath Account Services team at (847) 586-2239 to discuss the advantages of HSAs and FSAs.

Improve your benefits package with First American Bank

With First American Bank as your benefits partner, it’s never been easier to guide your team through the benefits process. Whether you’re interested in HSAs, FSAs, HRAs, or Commuter Benefits, we have you covered—with expertise, personalized service, and leading technology.

Learn more about our health benefit offerings by reaching our Health Account Services team at (847) 586-2239 or emailing [email protected].

Inject fresh value into your benefits offerings.
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The information is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own legal counsel, tax and investment advisers.
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