Health Savings Account (HSA) contributions can be made by the employer, the employee, or a combination of both, but there are strict rules to follow.
For small business owners, offering employees access to a Health Savings Account (HSA) is an affordable way to supplement the company’s benefit package while also providing some unique tax advantages.
However, small business owners must adhere to some strict rules regarding HSA contributions. Ignoring these rules can nullify the potential tax benefits of an HSA, or prevent your employees from opening one in the first place.
This guide will explore the question of who should pay the HSA contribution, and what rules and guidelines need to be followed to maximize the benefits.
Who Contributes to HSA for Small Business?
Every year, a certain amount of pre-tax money can be contributed to the HSA, where it can grow on a tax-free basis. As long as these funds are used for qualified medical expenses, they will remain totally tax-free. Over time, this can create significant savings that can be used to bolster retirement plans. This makes HSAs a well-appreciated health benefit that can really make a company stand out.
When a small business decides to offer their employees access to an HSA, it can be set up in a number of ways. In most cases, both the employee and the employer will make contributions to the HSA.
- EMPLOYEE contributions are made with pre-tax dollars. This money belongs to the employee, even if they leave the job, and the funds roll over from year to year.
- EMPLOYER contributions can be used as an income tax deduction for the small business. In addition, employers don’t have to pay any payroll taxes on these contributions.
Who Contributes More?
Employers can choose how much they want to contribute towards an employee’s HSA. The only restriction is that the total annual contribution between employer and employee cannot exceed the annual contribution limit.
The actual number varies a lot, but recent estimates place the nationwide average at about 30% of the annual limit. Employees can choose whether to contribute the entire remainder, or just a portion of it. Many employers simply offer to match their employees’ contributions.
What is the Annual Contribution Limit?
HSA contribution limits go up by about $50 a year for individuals and $100 for families.
In 2024, the individual HSA contribution limit is $4,150 for individuals and $8,300 for families.
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Get Started: How to Set Up an HSA for Your Employees
Starting a small business HSA program is fairly straightforward.
Here’s a summary of the four main steps:
- Make Sure Your Employees are Qualified. In order to open an HSA, an individual must be enrolled in an HSA-qualified High Deductible Health Plan (HDHP).
- Determine Your Contribution Amounts. Owners can decide whether to contribute to the HSA<, and if so, how much that contribution will be.
- Create a Section 125 Plan. This is a written plan that gives employees the option to receive a portion of their compensation either in cash or as a health benefit, like an HSA. Creating a Section 125 plan does require some paperwork, but can be easily handled by your HSA administrator.
- Manage Employer Contributions and Keep Up with Tax Documentation. This can also be handled by an HSA administrator.
Small Business HSA Contributions FAQ – Frequently Asked Questions
Q: Are HSA contributions considered taxable income to the employee?
A: Contributions made from an employee’s payroll into a Health Savings Account are not subject to Social Security tax, federal income tax, or Medicare taxes.
Q: What is a Health Savings Account (HSA)?
A: A Health Savings Account is a tax-advantaged savings strategy that allows individuals to set aside pre-tax dollars to spend on healthcare later in life. In addition to the contributions being pre-tax, they are also allowed to grow from year to year on a tax-deferred basis.
As long as HSA funds are spent on qualified medical expenses, there is also no tax liability upon withdrawal. This makes HSAs unique among competing retirement strategies like 401(k)s and IRAs.
Q: How much do employers pay for HSAs?
A: Employers can contribute anywhere from $0 all the way up to $4,150 annually into an individual’s HSA. ($3,850 is the contribution maximum for 2023).
Most employers contribute between 20% and 50% of the annual contribution limit, though it varies greatly from company to company.
Q: Does my business qualify for an HSA for employees?
A: If your business has employees, then you can set up what is called a cafeteria plan or 125 plan. This enables your employees to make pre-tax contributions to an HSA.
Q: Are small business HSAs tax deductible?
A: If you’re a small business owner with employees, any contribution you make into employee HSA accounts can be used as an income tax deduction.
Q: Can owners of LLCs participate in an HSA?
A: Yes, if you are an LLC owner or are self-employed, it is still possible to contribute to an HSA as long as you are also enrolled in an HSA-qualified high deductible health insurance plan (HDHP).
Q: What Are Accounting Best Practices for HSA Employer Contributions?
A: Accounting best practices for managing employer contributions to Health Savings Accounts (HSAs) involve a few key steps that align with general financial management principles. First and foremost, maintaining accurate and timely records is crucial. This ensures compliance with both tax and employment laws and facilitates easier financial planning and analysis.
Employers should integrate HSA contributions into their regular payroll and accounting systems, using clearly defined processes for tracking both employer and employee contributions. This should include scheduled checks to confirm contributions do not exceed legal limits.
It’s also vital to use a reliable HSA provider that offers robust tools and resources to assist in managing these accounts. A good HSA platform should provide a comprehensive dashboard that allows employers to view real-time data on contributions made, upcoming scheduled contributions, and the growth of savings due to these contributions. Such a system helps in forecasting and provides valuable insights for tax savings calculations and other financial planning purposes.
By partnering with a provider that offers an FDIC-insured HSA with strong support and easy access to information, employers can streamline their management of HSAs. This strategy minimizes additional workload and prevents the administrative aspect of HSAs from becoming a burden on the financial team.
Note: Not all HDHP plans are HSA-qualified, so be sure to check before enrolling.
The First Step of Small Business HSAs is a Qualified HDHP Health Insurance Plan
If you’re ready to offer a small business HSA, the first step is making sure that any participating employees are also enrolled in an HSA-qualified small business health insurance plan.
With a quick, no-cost consultation, our Personal Benefits Managers can show you the qualified plans that are available in your area.
But HSAs are not the only option when it comes to employee health benefits. To learn more about how you can protect your team’s health while also supporting your company’s bottom line, check out our complete guide, ‘The Only Guide You’ll Need to Small Business Health Insurance [2025 Update].
Hi! I’m Misty Berryman, and I’m one of your Personal Benefits Managers. I like working with HSA for America because we’re creating solutions to healthcare problems. Our focus on money-saving alternatives like HSA plans and health sharing programs, and the variety of health share programs we offer, are what set us apart. Read more about me on my Bio page.
