Health Savings Account (HSA)
Another creative strategy for managing health care costs and providing a valuable benefit for your employees is by utilizing a Health Savings Account (HSA). An HSA must be established only after the employer has offered a High Deductible Health Plan (HDHP) which is an insurance plan that meets certain requirements regarding deductibles and out-of-pocket expenses. By offering an HSA, employers are providing an avenue for employees to manage the higher deductibles. An HSA allows for pre-tax employer and employee contributions into an account for the sole purpose of paying qualifying medical expenses for the eligible employee. Employee contributions are pre-tax under a Section 125 Cafeteria plan although many of the rules for Cafeteria plans do not apply to HSAs. For example, HSAs are not subject to the "use it or lose it" rule in that funds may be carried over from one year to the next and the account is portable for terminated employees. Employers save on premiums as well as payroll taxes for all employees participating in the program.
The pre-tax contributions are put into a custodial account in the name of the account beneficiary. Normally, the employee is provided with checks and/or a debit card for paying their qualifying medical expenses. Third Party substantiation of claims is not currently required by law. However, the employee should be able to substantiate any withdrawal made from the account to prove it was for a qualified medical expense as defined in Section 213(d) of the Internal Revenue Code. Any distributions made from an HSA that are not for qualifying medical expenses will become taxable income to the employee. For this reason, many employers utilize PB&H Benefits for bookkeeping and compliance for the benefit of their employees.