Maximizing Health Savings with Tax-Smart HSAs for Small Businesses

Managing health care costs for yourself and your employees can be challenging as a small business owner. One effective tool to consider is a Health Savings Account (HSA). HSAs offer numerous benefits, helping you save on health care expenses while providing valuable tax advantages. With the IRS announcing inflation-adjusted amounts for 2025, it’s a good time to review how these accounts work.

HSA Basics

HSAs provide a tax-advantaged way for eligible individuals to set aside funds (or have their employers do so) for future medical needs. Employees must not be enrolled in Medicare or claimed on someone else’s tax return.

Key tax benefits include:

• Participant contributions to an HSA are deductible within limits.
• Employer contributions are not taxed to participants.
• Earnings on HSA funds are not taxed, allowing money to accumulate tax-free.
• Distributions for qualified medical expenses are not taxed.
• Employers do not pay payroll taxes on HSA contributions made through payroll deductions.

Key Amounts for 2024 and 2025

To qualify for an HSA, an individual must be covered by a high-deductible health plan. For 2024, the minimum annual deductible is $1,600 for self-only coverage and $3,200 for family coverage. These amounts increase to $1,650 and $3,300, respectively, in 2025.

The 2024 limit on deductible contributions is $4,150 for self-only coverage and $8,300 for family coverage. In 2025, these limits rise to $4,300 and $8,550, respectively. Additionally, the maximum annual out-of-pocket expenses for covered benefits in 2024 are $8,050 for self-only coverage and $16,100 for family coverage, increasing to $8,300 and $16,600 in 2025.

Individuals (and their covered spouses) aged 55 or older can make additional “catch-up” contributions of up to $1,000 for both 2024 and 2025.

Employer Contributions

Employer contributions to an eligible individual’s HSA 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 limit. There is no “use-it-or-lose-it” provision, so funds can accumulate over the years. Employers must generally make comparable contributions to the HSAs of all eligible employees within the same calendar year. Failure to do so may result in a 35% tax on the total amount contributed by the employer to HSAs during that period.

Using HSA Funds

Employees can use HSA distributions to pay for qualified medical expenses, which generally include costs that qualify for the medical expense itemized deduction, such as doctor visits, prescriptions, chiropractic care, and long-term care insurance premiums.

Withdrawals for non-qualified expenses are taxable, and an additional 20% tax applies unless the withdrawal is made after age 65 or due to death or disability.

HSAs offer a flexible option for providing health care coverage, though the rules can be complex. Contact us with any questions or if you’d like to discuss offering this benefit to your employees.