Employers may choose to make contributions to their employees’ HSAs as part of a Section 125 plan (also known as a “cafeteria plan” or a “salary reduction plan”). Employers gain greater savings by allowing their employees to contribute on a “pre-tax” basis to their own HSA via payroll deduction.
Does section 125 include HSA?
In a Section 125 HSA, employee contributions are taken as pre-tax salary deductions according to the election form completed during open enrollment period. The annual election amount is not pre-funded; however, funds deposited into an HSA are immediately available to pay or reimburse eligible medical expenses.
Who can participate in Section 125 plan?
Self-employed individuals, partners and more than 2 percent shareholders in an S corporation (or their business entities) may sponsor a Section 125 plan for their employees.
What is the difference between cafeteria plan and HSA?
A cafeteria plan is an employee benefits plan administered under Section 125 of the federal tax code that lets employees pay certain expenses with pretax income. Funding a health savings account, commonly referred to as an HSA, may be an option under a cafeteria plan.
How is a cafeteria plan different from an HSA?
The employer is just enabling the contribution for you through their payroll system. Cafeteria Plans are not unique to HSA’s; in fact, it is a general term used to describe pre-tax contributions made by your employer. They can be established for a variety of employee related savings or expenses.
Who is not eligible for a cafeteria plan?
Cafeteria plans are designed for employees. The IRS doesn’t consider self-employed individuals as employees, so they aren’t eligible for cafeteria plans. Also, LLC members, partners in a partnership, and 2% or greater owners of an S corporation are not allowed to make pre-tax HSA contributions through a cafeteria plan.
Can a C corporation participate in a cafeteria plan?
C corporation owners are generally allowed to participate in cafeteria plans, however. Bottom line, employers’ cafeteria plans are the most tax-advantaged way for individuals to contribute to their HSAs.
Where to put cafeteria plan contributions on form 8889?
The correct place to put contributions made through a cafeteria plan is on Line 9 of Form 8889, which is called “Employer Contributions”. This makes sense because, in our discussion above, we saw how cafeteria plan contributions look a lot like employer contributions.
