Tax-advantaged savings accounts, such as health savings accounts (HSAs) and flexible savings accounts (FSAs), are excellent ways for employees to save pre-tax dollars and reduce their taxable income.
They can file inevitable yet unexpected healthcare expenses such as dentist visits, therapy sessions, and even chiropractic or PT visits under these tax-deductible plans.
Offering and administering tax-advantaged accounts not only makes employers look good but also helps them save a portion of their money that goes toward employees’ payroll taxes. However, administering such accounts and keeping them compliant with IRS guidelines can be tough, inviting administrative expenses and regulatory responsibilities.
But what if there was a system that made it easier to deliver such benefits while reducing the strain on your HR team or budget?
Here’s where payroll integrations can play a crucial role. In this blog, we walk you through the benefits of syncing payroll integrations with tax-advantaged savings accounts.
What Is Payroll Integration?
Running a business and handling employee accounts is often a tangle of manual tasks involving paperwork, accounting and inventory-keeping. However, payroll integration digitizes these key tasks by syncing them with other financial and accounting software.
This helps your HR team manage your employees’ financial information, including consistent and compliant contributions to tax-advantaged accounts such as HSAs, FSAs and retirement accounts. The result? Your employees can easily pay for qualifying expenses with their pre-tax dollars.
Types of Tax-Advantages Savings Accounts
In addition to HSAs, FSAs and retirement plans, many other tax-advantaged accounts have recently gained popularity. These include:
- The 529 Plan for educational expenses
- Commuter benefits
- Individual Coverage Health Reimbursement Arrangement (ICHRA)
These tax-advantaged schemes can help you and your employees save money.
For example, several states offer credits and tax breaks for 529 Plan contributions. As such, offering them to employees who use them to qualify for educational expenses benefits both parties.
Another example is the ICHRA, a relatively new tax-advantaged plan. It allows businesses to allocate a fixed contribution to reimburse each employee’s healthcare costs without the added obligation or hassle of operating a group health plan.
Administering Tax-advantaged Savings Accounts: A Challenge
Offering benefit packages to employees brings lots of value, but implementing them, especially without an automated system, can be a challenge for employers.
You have to take several steps to administer your employees’ tax-advantaged accounts. This involves fulfilling key criteria set by the IRS, adhering to enrollment windows, and managing contributions.
Here are some administrative requirements you need to oversee:
- Most tax-advantaged accounts, including the ICHRAs, FSAs, and HSAs, have enrollment periods during which employees are eligible for benefits.
For instance, commuter benefits become available only after employees have worked at your company for 120 days. It is the employer’s responsibility to keep track of these windows and invite employees to enroll in the relevant benefits once they are eligible. - As an employer, you must manage employee contributions to tax-advantaged accounts based on the benefits they have chosen. This can be a complex process for some benefits, such as ICHRAs, because the amount your employee receives each month varies depending on their health insurance plan.
Sometimes, employees may exceed their reimbursement limit, which they need to pay through payroll deductions, further inviting adjustments in the paycheck amount. Without the right software, tracking each employee’s monthly contribution based on their benefits can quickly turn into an administrative nightmare.
- Employers must also estimate pre-tax deductions each month to calculate the payroll taxes and net compensation owed. This entails consistently updating the payroll system if and when the employee’s contributions fluctuate during the month.
For example, if an employee increases their HSA contribution mid-month to cover an upcoming medical expense, this change would have to be documented in the payroll system. Without recording these changes, you risk computing inaccurate FICA, payroll taxes, and deductions — compliance issues that could result in fines or penalties.
- Employers must also disclose each employee’s contributions on their wage and tax statement (W-2) to track their taxable income and benefits per IRS guidelines. These year-end reports are crucial during potential audit programs. Therefore, businesses need to meticulously maintain them with all relevant and up-to-date data.
How Payroll Integrations Benefit Tax-Advantaged Accounts
The processes outlined above indicate the amount of time, uncertainty, and administrative resources you require to manage your employees’ contributions to tax-advantaged accounts.
Without accurate and timely data, this process puts a lot of strain on HR and administrative personnel, especially when they are manually trying to determine an employee’s net pay or payroll taxes.
Payroll integrations provide a vital link between your company’s payroll system and the benefits provider. Besides making this task less tedious, here’s how they benefit tax-advantaged savings accounts:
Efficient Enrollment
If you manage a business with several employees, payroll integration can help you assimilate new employees into tax-advantaged savings accounts such as 401(k)s, HSAs, and FSAs. This ensures their accounts are automatically linked for contributions.
For example, instead of having employees fill out forms and gather paperwork, your HR team can directly enroll employees in an HSA or FSA program via the payroll platform by recording each employee’s contribution amount.
The payroll system would then deduct pre-tax contributions from employees’ paychecks each month while simultaneously transferring the details to the benefits provider.
There is little to no manual intervention necessary. This is because the software automates account setups and employee contributions, reducing the possibility of human error.
Access to Timely and Accurate Employee Data
Employee payroll data is dynamic and consists of several moving parts. It requires admin and HR teams to constantly switch between systems to access and update this data.
Manually managing this data can be overwhelming due to the number of changes that occur, from new staff hires to fluctuations in monthly contributions. You may wind up losing data or, worse, with discrepancies that cause a ripple effect through multiple accounting systems.
A centralized payroll integration platform can make this easier. Most payroll systems refresh and sync this data regularly, giving your teams access to accurate, up-to-date employee payroll data.
For example, you have an employee who recently upped their 401(k) contributions from 5% to 7%. Without a payroll system, you’d have to wait for this change to be routed through various systems or multiple teams to flag this change.
However, with a unified payroll integration system, your HR team can access this data in real-time without relying on or switching between systems.
Worry-free Compliance and Responsible Tax Reporting
Employers must follow key compliance guidelines while administering tax-advantaged savings accounts. The IRS regulates all aspects of your employees’ tax-advantaged savings accounts, whether it is their enrollment eligibility or pre-tax contributions.
As an employer, you are responsible for ensuring your employer contributions do not exceed the limit prescribed by the IRS.
Payroll integrations add a layer of security that helps both employers and employees comply with IRS regulations. It automates contributions, helping employees prevent inadvertent over-contributions that may result in tax penalties.
Moreover, your teams can easily generate updated annual tax reports through payroll integrations for year-end reporting and audits.
Using payroll integrations can also help your business save payroll taxes. When you efficiently manage pre-tax contributions, it encourages more employees to participate in tax-advantaged savings plans.
These accounts are exempt from Social Security, federal unemployment, and Medicare taxes, helping you save a substantial amount you’d spend on them otherwise.
Automated and Accurate Employee Contributions
Payroll integration helps your employees make timely contributions to their tax-advantaged accounts during each pay period. It coordinates data from both ends, such as calculating pre-tax contributions for the tax-saving program and deducting that amount from the paycheck in the employee payroll system.
In doing so, it adjusts all aspects of the contributions without seeking manual intervention from the employer. Payroll integration also syncs any real-time changes in a contribution, such as an increase in HSA from $100 to $150 in a given month, into the system. Such timely updates help eliminate human error and inaccurate contributions, saving both employer and employee taxes and fines.
Transparent Processes
Another clear benefit of payroll integrations for tax-advantaged savings accounts is that they improve employee experience and engagement. According to findings shared in the 2024 Employee Wellness Report, 86% of U.S. employees say that companies hold the responsibility of supporting employee’s financial well being
Calculating pre-tax contributions and tracking them through your systems for several employees can prove stressful not only for your admin but also for employees concerned about how their financial data is being handled. Payroll integrations take the unease and ambiguity of handling tax-advantaged accounts, paving the way for financial wellness and responsible tax reporting.
They also increase transparency in payroll processes for both parties. Employees can track their tax-advantaged account contributions, while employers can seamlessly report their employees’ contributions across the workforce.
Better Manage Tax-Advantaged Savings Accounts With Payroll Integrations
If you’re a growing business, you can overburden your admin teams and resources by letting them manually handle several hundred tax-advantaged accounts. This could lead to slip-ups and inaccuracies, resulting in fines and employee disengagement.
That’s why payroll integration is a remarkable solution to help you streamline HR operations and scale employee benefits as your business grows—minus the additional HR and admin workload.
