HSA for single-person S-corp

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Topic Author
meeotch
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Joined: Sun Sep 15, 2013 12:59 am

HSA for single-person S-corp

Post by meeotch » Thu Feb 13, 2020 2:24 pm

I've just recently discovered the various threads indicating that HSA contributions can be treated analogously to health insurance premiums, for self-employed s-corp owners. (I.e., the s-corp pays, you include payments in Fed wages but not in FICA wages on W2, then take the personal deduction on 1040.) My question is: should the HSA plan be a "company-provided account" (set up by the corp, and then enrolled in by the employee), or an "individual account" (set up by the employee, unrelated to any specific employer)?

I know that the IRS has specifically given guidance w.r.t. insurance premiums that either an employer-provided policy or an individual policy is acceptable, but I'm unaware of similar guidance for HSAs. An individual account is my preference, since Fidelity offers them fee-free, whereas they charge for employer plans - and presumably the latter require more paperwork.

Again - single-person s-corp, no employees, no spouses or other complicating factors. (Also, I know - "ask your CPA"... I just like to form my own opinion and go to him with supporting evidence. I do a pretty good job of convincing him about half the time.)

(For those who don't agree that both products exist, here's what I'm talking about: https://www.fidelity.com/go/hsa/hsa-provider The one on the left costs nothing, the one on the right has administrative fees.)
Last edited by meeotch on Fri Feb 14, 2020 1:24 pm, edited 3 times in total.

UnclePennybags
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Re: HSA for single-person S-corp

Post by UnclePennybags » Thu Feb 13, 2020 2:59 pm

It is my understanding that HSA contributions made on behalf of a 2% or greater shareholder are treated the same as health insurance premiums -- they are reported on the W-2 as income, not subject to FICA. That is how my wife's HSA contributions are treated by our CPA. The HSA account is in her name personally. It also deducts from income "above the line." We've done it this way for the past two years, vetted by our CPA and have had no issues. We use Fidelity for the free HSA account.

It gets complicated when you have employees making pre-tax contributions, which as far as I understand cannot be done by an owner.

Spirit Rider
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Re: HSA for single-person S-corp

Post by Spirit Rider » Thu Feb 13, 2020 6:27 pm

An HSA account like all tax-advantaged accounts is an individual account. It can only be owned by the 2% shareholder-employee. However, just like health insurance premiums, the S-Corp can directly make or reimburse HSA contributions.

jacoavlu
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Re: HSA for single-person S-corp

Post by jacoavlu » Fri Feb 14, 2020 12:00 am

open your individual HSA at Fidelity. It is very simple. Once open you can find the HSA account number and routing number, just like your checking account for direct deposit for your paycheck. Provide these numbers to payroll provider and have the HSA contribution from the S Corp run through payroll.

Topic Author
meeotch
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Re: HSA for single-person S-corp

Post by meeotch » Fri Feb 14, 2020 12:56 pm

Thanks for the replies. Though I feel like most of the info in this thread is tangential to my original question, the first respondent seems to have provided at least one data point: "The HSA account is in her name personally."

The notion that "all tax-advantaged accounts are individual accounts" seems to miss my point, though. The holdings of all such accounts are obviously owned by the individual. But that doesn't mean there's no difference between an account that you set up individually (e.g. an IRA), and an account set up through an employer-run plan (e.g. a 401k). In the case of HSAs, both options are available, as mentioned in the original post. My question, in a nutshell, was whether that mechanical difference corresponded to a statutory difference.

I'm going to do the thing I wanted to do, which was open the account as an individual, then make the contributions directly from the S-corp. I believe the statute says something to the effect of "contributions made to an employee's HSA", and that sounds like the closest match.

For other folks stumbling on this thread, some additional info. A good discussion, along with quotes from statutes/guidance is here:
viewtopic.php?t=125518

Also, and I don't have the link on me, but in one of the threads on the topic, it was mentioned that the S-corp should make the HSA contributions itself. The reason given was that for insurance premiums, the IRS has specifically allowed reimbursement as well as direct payment as a "guaranteed benefit", but no similar guidance has been given for HSAs.

theplayer11
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Re: HSA for single-person S-corp

Post by theplayer11 » Fri Feb 14, 2020 1:07 pm

Not sure how you can have a HSA in your company name. As stated by others, run it through payroll. It will be in your name.

Topic Author
meeotch
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Re: HSA for single-person S-corp

Post by meeotch » Fri Feb 14, 2020 1:21 pm

I've updated the original post to hopefully clarify what I'm talking about. There are indeed two ways of going about this. Anyway, I've made my decision - so thanks for the replies.

@theplayer11 - the contribution will show up on payroll (similar to an s-corp funded insurance policy), but you should be clear that "run it through payroll" does *not* mean that you can deduct it pre-tax from your salary via payroll (like a 401k deferral). It shows up on payroll either way, but the latter is specifically disallowed.

theplayer11
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Re: HSA for single-person S-corp

Post by theplayer11 » Fri Feb 14, 2020 1:29 pm

meeotch wrote:
Fri Feb 14, 2020 1:21 pm
I've updated the original post to hopefully clarify what I'm talking about. There are indeed two ways of going about this. Anyway, I've made my decision - so thanks for the replies.

@theplayer11 - the contribution will show up on payroll (similar to an s-corp funded insurance policy), but you should be clear that "run it through payroll" does *not* mean that you can deduct it pre-tax from your salary via payroll (like a 401k deferral). It shows up on payroll either way, but the latter is specifically disallowed.
sounds like you don’t need/want help. Good luck

Topic Author
meeotch
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Re: HSA for single-person S-corp

Post by meeotch » Fri Feb 14, 2020 1:42 pm

theplayer11 wrote:
Fri Feb 14, 2020 1:29 pm
sounds like you don’t need/want help. Good luck
If anyone disagrees with the way I've decided to go about it, I'm still happy to hear their rationale. The original question was a request for help finding & interpreting the relevant statutes / IRS guidance.

But yes, I hope my edits to the original post put an end to the side-discussion regarding whether the question is even legitimate or not.

UnclePennybags
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Re: HSA for single-person S-corp

Post by UnclePennybags » Tue Feb 25, 2020 4:25 pm

meeotch wrote:
Fri Feb 14, 2020 1:42 pm
theplayer11 wrote:
Fri Feb 14, 2020 1:29 pm
sounds like you don’t need/want help. Good luck
If anyone disagrees with the way I've decided to go about it, I'm still happy to hear their rationale. The original question was a request for help finding & interpreting the relevant statutes / IRS guidance.

But yes, I hope my edits to the original post put an end to the side-discussion regarding whether the question is even legitimate or not.
FWIW, I did understand the difference, but for us going with the individual vs corporate plan was a no-brainer because the corporate approach added costs with no significant upside. If you set up a whole cafeteria plan, you could avoid some tax, but I suspect it would cost more than it saves.

Spirit Rider
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Re: HSA for single-person S-corp

Post by Spirit Rider » Tue Feb 25, 2020 5:29 pm

meeotch wrote:
Fri Feb 14, 2020 12:56 pm
The notion that "all tax-advantaged accounts are individual accounts" seems to miss my point, though. The holdings of all such accounts are obviously owned by the individual. But that doesn't mean there's no difference between an account that you set up individually (e.g. an IRA), and an account set up through an employer-run plan (e.g. a 401k). In the case of HSAs, both options are available, as mentioned in the original post. My question, in a nutshell, was whether that mechanical difference corresponded to a statutory difference.
Actually, the fact that HSA accounts are individual, is exactly 100% on point.

HSA accounts are not set up through an employer plan, they are still opened by the individual. All an employer Section 125 plan does regarding HSA contributions is allow them to be made by employee salary reduction and deposited in the employee's HSA. This is what allows them to be pre-FICA/income tax. Not to mention that even if the S-Corp had a Section 125 plan for non-2% shareholder-employees, a 2% shareholder-employee is not eligible to participate in an employer health & welfare plan and receive pre-tax benefits. Even if directly made by the S-Corp, the 2% shareholder-employee's HSA contributions are direct deposits of taxable compensation.

Health Insurance premiums are a totally different scenario, because there is a distinct difference between a health insurance policy and health insurance coverage. An S-Corp can have a health insurance policy covering 2% shareholder-employees and non-2% shareholder-employees. Even this is not likely relevant post Obamacare, because insurance companies will not issue employer group plans only covering 2% shareholder-employees. Only in this scenario is the health insurance policy in the name of the S-Corp.

Bottom line: An S-Corp covering only 2% shareholder-employees and optionally their spouses are going to have individual health insurance policies and/or HSA accounts. The S-Corp can pay/contribute or reimburse the individual health insurance premiums and HSA contributions of 2% shareholder-employees. There is not going to be a health insurance policy in the name of the business and it is not possible for there to be an HSA account in the name of the business.

Topic Author
meeotch
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Re: HSA for single-person S-corp

Post by meeotch » Tue Feb 25, 2020 6:15 pm

@UnclePennybags - it sounds like you got what I was asking, and came to the same decision. (Though iirc, 2% shareholders can't participate in cafeteria plans, pre-tax, so I'm not sure that's even an option.)

@Spirit Rider - Presumably, if you were to go to the Fidelity link in the OP, click on the right-hand product ("I am an Employer"), and go through the setup steps, you'd end up with some sort of HSA "thing" (plan/unit/artifact) that was administered by Fidelity, and connected to your company in some way. This thing wouldn't be an HSA "account" in the sense of an account that holds assets that you can draw on for medical expenses. In fact, I'm not sure what it would be, other than a bunch of paperwork and a login/password, but I assume it would be something rather than nothing, since Fidelity would be charging you for it. (Maybe all it does is send your employees Fidelity links in an email that says, "Set up your HSA here!" and then tells you when they've done it.)

If I understand your post correctly, you're implying that you'd then have to go back and set up an "actual" (asset-holding) HSA as an individual. On this point, I think we're already in agreement. But you'd presumably you'd reference the first "thing" somehow - e.g. via a link. (Otherwise, why offer the first "thing" as a product at all?)

My original question was whether this two-step process is statutorily any different than just doing the second (individual) part, and never giving Fidelity your business info at all. I take it that you're saying no, there's no difference. In which case, I think you, me, and pennybags are on the same page now.

Spirit Rider
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Re: HSA for single-person S-corp

Post by Spirit Rider » Tue Feb 25, 2020 10:11 pm

meeotch wrote:
Tue Feb 25, 2020 6:15 pm
@Spirit Rider - Presumably, if you were to go to the Fidelity link in the OP, click on the right-hand product ("I am an Employer"), and go through the setup steps, you'd end up with some sort of HSA "thing" (plan/unit/artifact) that was administered by Fidelity, and connected to your company in some way. This thing wouldn't be an HSA "account" in the sense of an account that holds assets that you can draw on for medical expenses. In fact, I'm not sure what it would be, other than a bunch of paperwork and a login/password, but I assume it would be something rather than nothing, since Fidelity would be charging you for it. (Maybe all it does is send your employees Fidelity links in an email that says, "Set up your HSA here!" and then tells you when they've done it.)
We are having a fundamental failure to communicate. I thought I was very clear, but you are still not getting it.

As I already explained, an S-Corp 2% shareholder-employee with no non-owner/spouse employees can not have an employer health & welfare plan. Even if you had non-2% shareholder employees and a Section 125 plan with employee health insurance and HSA plan support. You can not participate in this plan.

Everything else is moot.

The only choice you have is whether the S-Corp contributes directly to an HSA account you open somewhere or you contribute to that account and the S-Corp reimburses you.
Last edited by Spirit Rider on Tue Feb 25, 2020 11:56 pm, edited 1 time in total.

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MP123
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Re: HSA for single-person S-corp

Post by MP123 » Tue Feb 25, 2020 11:14 pm

Spirit Rider wrote:
Tue Feb 25, 2020 5:29 pm
Bottom line: An S-Corp covering only 2% shareholder-employees and optionally their spouses are going to have individual health insurance policies and/or HSA accounts. The S-Corp can pay/contribute or reimburse the individual health insurance premiums and HSA contributions of 2% shareholder-employees. There is not going to be a health insurance policy in the name of the business and it is not possible for there to be an HSA account in the name of the business.
This is a good summary and in my experience as an S-Corp owner completely right. You'd need at least one employee (non-related) for anything else.

Topic Author
meeotch
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Re: HSA for single-person S-corp

Post by meeotch » Wed Feb 26, 2020 12:08 am

If what you're saying is that the "I am an Employer" link I keep referencing points to a cafeteria (sec 125) plan, then yes, that is clearer to me than previous phrasing. I was aware that 2% shareholders can't participate in cafeteria plans, but didn't spot any references to such plans on the website, hence the confusion as to what that product actually was...

In fact, when UnclePennybags first mentioned cafeteria plans, I wasn't even sure why he was bringing it up, or why you continued his thought... The page doesn't mention any of the other possible components of a sec 125 (e.g. FSAs) - it just goes on and on about how great HSAs are. I assumed it was some other sort of administrative product related solely to HSAs, which I think was fairly reasonable.

Anyway, thanks for clarifying your assertion. Out of curiosity, I fired off an email to Fidelity to confirm that what that page offers is a sec 125. The URL actually seems to point to something called "Fidelity Workplace", which sounds like it could be a 125.

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