Healthy Savings: How Health Savings Accounts (HSAs) Can Benefit Your Small Business and Employees

As a small business owner, managing health care costs for yourself and your employees can be challenging. One effective tool to consider is a Health Savings Account (HSA). HSAs offer a range of benefits that can help you save on health care expenses while providing valuable tax advantages. If you already have an HSA, now is a good time to review how these accounts work, especially since the IRS has announced the inflation-adjusted amounts for 2025.

HSA Basics

For eligible individuals, a Health Savings Account (HSA) provides a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Employees can’t be enrolled in Medicare or claimed on someone else’s tax return.

Here are the key tax benefits of an HSA:

• Contributions made to an HSA are deductible within limits.
• Employer contributions to an HSA aren’t taxed to participants.
• Earnings on HSA funds grow tax-free, allowing for year-over-year accumulation.
• Distributions from an HSA for qualified medical expenses are not taxed.
• Employers benefit from not having to pay payroll taxes on HSA contributions made through employee payroll deductions.

Key 2024 and 2025 Amounts

To qualify for an HSA, an individual must be covered by a “high-deductible health plan.” For 2024, this means a plan with an annual deductible of at least $1,600 for self-only coverage or $3,200 for family coverage. For 2025, these thresholds will increase to $1,650 and $3,300, respectively.

The 2024 limit on deductible contributions to an HSA is $4,150 for self-only coverage and $8,300 for family coverage. For 2025, these amounts will rise to $4,300 and $8,550. Additionally, annual out-of-pocket expenses for covered benefits are capped at $8,050 for self-only coverage or $16,100 for family coverage in 2024. In 2025, these limits increase to $8,300 and $16,600.

Eligible HSA contributors aged 55 or older can also make additional “catch-up” contributions of up to $1,000 for both 2024 and 2025.

Making HSA Contributions for Your Employees

Employers who contribute to an employee’s Health Savings Account (HSA) offer a significant benefit. These contributions are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee’s gross income up to the deduction limitation.

Unlike some other benefits, HSAs don’t have a “use-it-or-lose-it” provision, so funds can roll over from year to year. Employers must generally make similar HSA contributions for all comparable employees to avoid a 35% tax penalty on contributions.

Using HSA Funds for Medical Expenses

Employees can use HSA distributions to cover qualified medical expenses, including doctor visits, prescriptions, chiropractic care, and premiums for long-term care insurance.

If HSA funds are withdrawn for non-qualified expenses, the withdrawal is taxable, and a 20% additional tax applies unless the withdrawal occurs after age 65, in cases of disability, or upon death.

Maximize the Benefits of an HSA

A Health Savings Account (HSA) provides flexibility and tax advantages for managing healthcare expenses. However, understanding and implementing the rules can be complex. Contact us to learn more about how an HSA can benefit you and your employees or to discuss adding this valuable tool to your benefits package.

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