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Why Cafeteria Plans Matter For HSAs

Why Cafeteria Plans Matter For HSAs

You may have heard that there’s no such thing as a free lunch. But by taking advantage of your employer’s cafeteria plan, you can get free money in extra tax savings from your HSA contributions.

What Is A Cafeteria Plan?

Cafeteria plans are employee reimbursement plans that are governed by Section 125 of the IRS tax code. When employers establish cafeteria plans, their employees have the option of making pre-tax contributions to their HSAs via payroll deferral. Without a cafeteria plan, employees only have the option to contribute post-tax and deduct their contributions from their tax return.

What’s So Good About Cafeteria Plans?

When you contribute to your HSA, you don’t have to pay federal and state income taxes (in almost all states) on that contribution. However, when you use your employer’s cafeteria plan to contribute to your HSAs pre-tax, you also save on payroll taxes like FICA and FUTA; that’s an extra 7.65% you’ll save! And pre-tax contributions through a cafeteria plan are the only way to unlock that extra 7.65% in savings.

Also, employers don’t have to pay payroll taxes on their employees’ pre-tax contributions through a cafeteria plan. Everyone wins! Employers also don’t have to put payroll taxes on their own contributions to employees’ HSAs.

Is There Any Downside To A Cafeteria Plan?

Not for employees! Employers who offer cafeteria plans must follow IRS nondiscrimination rules, which forbid highly-paid employees from benefiting disproportionately from the plan as compared to lower-paid employees. However, employers who offer cafeteria plans are not subject to IRS comparability rules, which are generally stricter than nondiscrimination rules.

What If My Employer Doesn’t Offer A Cafeteria Plan?

If your employer doesn’t offer a cafeteria plan, you can’t open a cafeteria plan by yourself. And if you’re married, you can’t make pre-tax contribution into your spouse’s HSA. You’ll need for your employer to open a cafeteria plan so you can start taking advantage of those extra payroll savings.

What If I’m Self-Employed Or A Business Owner?

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. 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. If your employer offers an HSA cafeteria plan, you’re leaving tax savings on the table if you’re not participating in it.

Want to know if you’re eligible to open an HSA? Take our quick 7-question quiz.

Author: James Denison


2018 HSA contributions can be made until April 15th. Individuals, select "Contribute to 2018" when scheduling a contribution. Employers, select "File Upload" when scheduling a contribution, then note "Fiscal Year 2018" in your file template.