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Pros and Cons - Pre-tax/After-Tax HSA contributions


Guest justbetmd
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Guest justbetmd

I am working with a company to increase participation in HSAs. Currently, employees contribute to their HSAs on an after tax basis and the Company also makes a contribution to the HSA. The Company has a cafeteria plan and wants to determine whether is makes sense to amend the cafeteria plan to provide for pre-tax contributions, rather than continuing the post-tax procedures -- thoughts???

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I am working with a company to increase participation in HSAs. Currently, employees contribute to their HSAs on an after tax basis and the Company also makes a contribution to the HSA. The Company has a cafeteria plan and wants to determine whether is makes sense to amend the cafeteria plan to provide for pre-tax contributions, rather than continuing the post-tax procedures -- thoughts???

It makes sense to me. If the employees can make their HSA contributions pretax through the cafeteria plan, they save the social security and medicare taxes as well as the federal income tax. If they just deducted it on their federal income tax return, they would just get the income tax deduction.

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You may want to look at if the employer makes any contributions. Some of the more recent HSA regulations that have come out indicate that if the employees have the option to contribute through pre-tax salary reductions through a Cafeteria Plan, the employer contributions are also considered as going through the Cafeteria Plan. That can be good or bad depending on how the employer determines contributions. The employer contributions are subject to Comparable Contribution Regulations if they do it outside of a Cafeteria Plan (the way it's apparently set up now) and have to abide by nondiscrimination testing rules if they contribute through the Cafeteria Plan (i.e. if a salary reduction option is set up). If I'm not mistaken H.R. 6111 that the Senate JUST passed and is waiting for the President's signature (but from what I've read he's expected to sign it) does loosen some requirements on HCEs in the Comparable Contribution Regs.

I'm currently working on amending an existing Cafeteria Plan to include Salary Reduction for HSA and also a limited purpose FSA. There's a lot of information out there about HSAs so if you look you should be able to find it! Hope that helps!

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If the employer already has a 125 plan in place, it's a slam dunk no brainer to add HSA elections as an eligible benefit. If you've seen some of the sorry interest rates being paid by HSA custodians, (like any typical bank savings account) then you will understand the value of SLuskin's comment above. Anything that can add an extra 7.65% (plus state income tax per cent) is very worth doing. Furthermore, most plan administrators are familiar with 125 requirements but not the 223 comparability requirements. When pre-taxed under 125, the 223 comparability requirements go away.

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  • 3 years later...
Guest sanchanim
If the employer already has a 125 plan in place, it's a slam dunk no brainer to add HSA elections as an eligible benefit. If you've seen some of the sorry interest rates being paid by HSA custodians, (like any typical bank savings account) then you will understand the value of SLuskin's comment above. Anything that can add an extra 7.65% (plus state income tax per cent) is very worth doing. Furthermore, most plan administrators are familiar with 125 requirements but not the 223 comparability requirements. When pre-taxed under 125, the 223 comparability requirements go away.

i know of one PEO company (Administaff) that has a 125 plan inplace, but has not amended it to include HSA elections. I really wonder why. They are big enough to know and should provide better services. After all, they are in the benefits admin business. What might be a reason for them to not allow HSA pre-tax deduction? Anyone have a guess?

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