Can Employers Limit HSA Contributions?

The ins and outs of health savings accounts, or HSAs, can sometimes be confusing for employers.  We’ve answered one common question in our blog below.

Question

Can HSA contributions made via payroll be limited by the employer in the same way a flexible spending account (FSA) limit can be? That is, if the IRS limit on an HSA is $6,900, could we limit that to $3,000 via payroll and if the employee wants to put more in they have to do that on their own?

Answer

Yes, they can be limited because there is no requirement to allow the full annual contribution limit through payroll.

Pursuant to § 223 of the Internal Revenue Code, contributions to a HSAs are subject to dollar limits. The maximum annual contribution is based on whether the taxpayer is enrolled in self-only coverage or family coverage under a qualifying high deductible health plan (HDHP). For the 2018 tax year, the annual limits are $3,450 (self-only) and $6,900 (family). The annual limits are prorated if the taxpayer is not eligible for all 12 months of the tax year. An additional $1,000 annual limit applies to eligible taxpayers age 55 or older.

Employers may choose to allow eligible employees to elect to make HSA contributions, up to the § 223 limits, through payroll. Employers are not required to offer this convenience to employees. Further, employers that do offer this option are not required to allow the full maximum limit. Employees who do not contribute the full limit through payroll may make additional contributions to the same HSA (assuming the HSA custodian accepts direct contributions) or they may establish another HSA with any IRS-approved HSA custodian (e.g., bank or other financial institution) to make additional contributions. The § 223 limits apply to all contributions whether made to one or more than one HSA.

Note that most employers that offer employees the option of making HSA contributions through payroll do allow the full annual limits. Pretax contributions made through payroll are not subject to federal income taxes (or most state income taxes), nor payroll taxes such as FICA. This provides an immediate tax savings to the employee with respect to both income taxes and payroll taxes, and also provides a tax savings to the employer with respect to FICA or other employer-paid payroll taxes. If the employee makes HSA contributions outside of payroll, they will still enjoy income tax savings, but in that case the taxpayer will report the contributions as an above-the-line deduction when filing an annual tax return.