HSAs and Greater Than 2 Percent Shareholders

Health savings accounts (a.k.a. HSAs) are becoming more and more common in the workplace. With an HSA, both the qualifying employee and the employer can contribute to the employee’s HSA. HSAs have many appealing elements – three of those attributes are:

1)When a qualifying individual contributes to his or her HSA, the employee will be able to take an above-the-line deduction for the contribution on his or her individual income tax return.

2)When an employer contributes to an employee’s HSA, the employer can take a business deduction for the amount of their contribution and the employee does not have to report the contribution as taxable income.

3)All withdrawals used to cover qualified medical expenses are tax-free.

With the items listed above, it looks like it is a win-win situation for the employer and employee, right? The answer is yes unless the employee is a greater than 2 percent shareholder of the company.

Greater than 2 percent shareholders of an S Corporation have different requirements when it comes to an HSA. Any contribution made by the employer to the HSA of a greater than 2 percent shareholder must be included as taxable income on the shareholder’s W-2, but are not subject to employment taxes. To help offset the impact of including the company’s contribution as taxable wages, the shareholder can take an above-the-line tax deduction on their personal income tax return equal to the contribution.

Please contact me if you have questions regarding HSA contributions or would like additional information about HSAs.