Can Employers Match Employees' Payroll Contribution to Encourage HSA Funding?

By William G. (Bill) Stuart | Originally posted on Health Savings Academy

Question of the Week

This column is an excerpt (Question 167) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: I want to encourage my employees to contribute to their Health Savings Accounts. Can I offer a matching contribution, as I do when I nudge them to contribute to the 401(k) plan?

Answer: Yes. Matching contributions are an underutilized tool at an employer’s disposal to encourage employees to make regular deposits into their Health Savings Account.

Many companies have adopted this practice to nudge employees fund their 401(k) plan or other employer-sponsored retirement program. Astute employees – even those reluctant to divert any of their gross income from their net paycheck – often contribute at least enough to receive the full employer match. After all, if you provide a dollar-for-dollar match, each dollar of employee contributions earns an instant 100% return. No other investment offers such an impressive immediate return with no risk.

You cannot launch a matching-election program unless your contributions are governed by a Cafeteria Plan. That requirement almost never represents an additional burden, however. Nearly all companies’ Health Savings Account programs are governed by a Cafeteria Plan because it’s the only way that employees can make pre-tax payroll deductions. Payroll taxes aren’t applied to those contributions, saving employers (and employees) $76.50 on every $1,000 contributed to an account.

Tips

Here’s how an employer can use this concept to help employees build their balances while perhaps reducing the employer’s long-term financial commitment:

In the first year, you match the first $1,500 of contributions dollar-for-dollar. Most employees deposit some amount (particularly if you adopt default elections) (see Question 166). And more employees will contribute the full $1,500 than would without the company match.

In subsequent years, you can continue the plan at this level of match or you can make subtle changes to reduce your later outlays. You may offer a dollar-for-dollar match of a declining dollar amount, perhaps reducing the matched amount by $250 annually to a figure of maybe $500 or $750 per year. Or you may match a declining percentage, perhaps decreasing it by 10% or 20% annually until it settles to a 50% match. In this approach, you match each $100 contributed by employees with $90 or $80 or $50, rather than $100.

What happens in subsequent years isn’t nearly as important as what occurs in the first year. Once employees have set their contribution level, they usually don’t reduce it in response to a lower company match. Why? For the same reason that most employees do not opt out of default elections – because they’re more likely to retain the status quo (apply inertia) than to make a change.

A best practice for employers is to continue employees’ pre-tax payroll deductions into the following calendar or plan year until employees proactively make a change. Health Savings Accounts are unlike Health FSAs. Employees don’t make a binding election to a Health Savings Account. They can change their contribution levels at any time, but they’re not required to renew their commitment under Cafeteria Plan rules. So why make them think about their contribution level annually and perhaps reduce it?