QUESTION: Our firm presents a high-deductible well being plan (HDHP), and plenty of individuals contribute to their very own HSAs. A number of have requested about making HSA contributions on a pre-tax foundation to allow them to obtain earnings tax financial savings each payroll interval (as an alternative of ready till they file their tax returns) and keep away from paying FICA taxes on these contributions. Our firm may additionally save its share of FICA taxes on the contributions. Do we want a Code § 125 cafeteria plan to do that, or can we simply arrange pre-tax payroll deductions for our workers and not using a cafeteria plan?
ANSWER: Your workers can not make pre-tax HSA contributions until your organization presents a Code § 125 cafeteria plan. That’s due to the constructive receipt doctrine, which applies every time an worker is obtainable a alternative between a nontaxable profit (e.g., HSA contributions) and a taxable profit (e.g., money or common pay). Constructive receipt treats workers, for tax functions, as having elected the taxable profit, no matter their precise alternative. (In different phrases, the taxable profit that workers may have elected must be included of their gross earnings.) Code § 125 offers an exception to that doctrine if the selection between nontaxable advantages and taxable money or common pay is obtainable beneath a cafeteria plan.
HSA contributions made by a cafeteria plan are excludable from workers’ gross earnings and won’t be topic to federal earnings tax withholding or FICA (Social Safety and Medicare), FUTA (federal unemployment), or RRTA (Railroad Retirement Tax Act) taxes. (You’ll have to examine on state or native withholding necessities.) Code § 125 imposes numerous authorized necessities on cafeteria plans. For instance, the plan should (1) be in writing; (2) describe who’s eligible to take part; (3) specify the out there advantages (reminiscent of pre-tax HSA contributions); (4) enable individuals to alter their HSA contribution elections not less than month-to-month (and upon lack of HSA eligibility); and (5) fulfill sure nondiscrimination necessities.
If your organization processes payroll deductions for workers’ HSA contributions with out organising a cafeteria plan, it must deal with these contributions as taxable compensation topic to all relevant withholding necessities, and it’ll nonetheless be answerable for paying the employment taxes. (Workers can nonetheless take an above-the-line deduction on their particular person tax returns for his or her HSA contributions.) Employers that fail to deal with payroll deductions made and not using a cafeteria plan as taxable compensation shall be liable not just for unpaid employment taxes, but additionally curiosity and penalties. There may be additionally the chance of prison prosecution for a realizing failure to report and pay the taxes.
For extra data, see EBIA’s Consumer-Driven Health Care handbook at Part XVIII.B (“HSAs Supplied By Cafeteria Plans”). See additionally EBIA’s Cafeteria Plans handbook at Sections III (“Why Have a Cafeteria Plan?”), VII (“Overview of Cafeteria Plan Authorized Necessities”), and XVI.Okay (“Particular Issues for HSAs Supplied By Cafeteria Plans”).