How to set up a Small Business HSA [2025 Update]
By Christine Corsini – Updated Oct 5, 2024
Reviewed by Mike Montes – Fact checked by Leslie Jablonski
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Over the last few years, small businesses have gained access to a number of tax-fee employment benefits, making it easier and more affordable than ever to compensate employees.
Through it all, the Health Savings Account (HSA) has emerged as one of the most versatile benefit options on the market.
Best Investment tools
These personal medical savings accounts are triple tax advantaged, creating one of the best investment tools available.
Tax Deductable & Funds Rollover
Not only are HSA contributions tax deductible for the employer but the funds rollover from year to year and belong entirely to the employee.
This makes HSAs a very valuable benefit for prospective talent.
Step-by-Step Guidance
This guide will explain the nuts and bolts of how small business HSAs work. It will also provide step-by-step guidance on how to set up an HSA for your employees, and information on how HSAs can work alongside group plans, HRAs, or even health sharing plans.
Key Takeaways: Small Business HSA
Here are the most important takeaways for any small business owner looking to setup an employee HSA:
HSAs are Triple Tax Advantaged
- All contributions are tax-deductible
- Earned interest and dividends are tax-deferred
- Withdrawals are tax-free if used for qualified medical expenses
Contributions to Employee HSAs are Income Tax-Deductable
For employers and employees like, all HSA contributions are tax-deductible, and can be handled directly through payroll. Employers also do not have to pay payroll tax on contributions made by employees.
HSAs Have No Contribution Minimums
This means that employers can choose exactly how much to contribute, from $0 all the way up to the annual contribution limit. Similarly, the employee can choose how much of the remainder to fund, with pre-tax dollars from payroll.
HSAs Work With Other Health Benefits
If you already offer a group plan, a small business HRA, or even certain health sharing plans to your employees, an HSA can be added at little to no cost. While not all plan options are HSA qualified, there is almost always an HSA option available.
Read on the go, download our Complete Guide To Small Business Healthcare Plans.
Q: What is an HSA / Health Savings Account?
An HSA is a tax-advantaged savings account designed to help individuals with high deductibles pay for out-of-pocket costs. All contributions to HSAs are tax deductible, and the funds are allowed to grow on a tax-deferred basis.
HSAs are available to employees who are enrolled in an HSA-qualified health plan, which can include group insurance, ICHRAs, or even some health sharing plans.
Q: How does an HSA work?
HSAs are funded by pre-tax dollars. The employer can choose to fund any amount, from zero all the way up to the contribution maximum. Employees can also choose how much to contribute, and these contributions can be deducted directly from payroll.
The money in the HSA will roll-over from year to year, earning tax-deferred interest in the meantime. The employee owns the account and the funds inside it, and can choose to withdraw them at any time. However, only withdrawals used to pay for qualified medical expenses will remain tax-deductible.
Q: Can I have an HSA if I’m self-employed?
If you are self-employed, you can open and contribute to an HSA if you’re enrolled in an HSA-qualified plan. Typically, high deductible health plans (HDHP) are HSA-qualified, and they are always advertised as such.
Self-employed individuals are not eligible to open an HSA if:
- You’re covered by your spouse’s group health insurance plan, and that plan is not HSA-qualified
- If you’re claimed as a dependent on someone else’s tax return
- If you’re enrolled in Medicare or Medicaid
Q: Which businesses can offer / contribute to employee HSAs?
HSAs are available to any individual or employee that is enrolled in an HSA-qualified plan. This includes high-deductible group or individual health insurance plans, as well certain MEC (Minimum Essential Coverage) insurance plans that are often used in combination with health sharing plans.
Even businesses with only a handful of employees can contribute to employee HSAs.
Q: Who contributes to an employee HSA?
Contributions to an HSA are usually made by a combination of the employer and the employee. The employer can choose the contribution amount, and also has the option to fund the entire annual contribution limit.
Q: Can you deduct HSA contributions through payroll?
HSA contributions can be automatically deducted from an employee’s paycheck. This contribution is pre-tax for the employee, and is not subject to payroll tax either.
Q: What is a high deductible health plan?
In order to open an HSA, an individual needs to be enrolled in a high deductible health plan (HDHP). When a health insurance plan is advertised as HSA-qualified, that means that it is also an HDHP.
In recent years, new HSA-eligible options have emerged. For example, HRAs can reimburse your employees for the cost of their own HDHP plan, allowing them to open an HSA. There are also highly affordable Minimum Essential Care (MEC) plans that can work with healthshare plans.
Q: What is a Section 125 cafeteria plan?
A Section 125 “cafeteria plan” makes it possible for employers to compensate their employees on a tax-free basis for the cost of healthcare. With a Section 125 plan, employers offer a fixed tax-free benefit amount, and employees can choose how to spend that benefit.
Employees can either put that benefit towards health insurance premiums, or receive the same amount in their salary. If the benefit is used for eligible benefits, it remains tax-free. If the employee chooses to receive the benefit as part of their salary, it will be subject to taxes.
Section 125 plans are relevant because they can make it easier for your employees to contribute to an HSA. They can also make HSAs even more affordable for employers. Under a Section 125 Plan, employee HSA contributions are not subject to Social Security tax, Medicare tax, or FUTA.
Section 125 Plans are not required to make contributions to an employee HSA, as contributions can also be made directly.
Q: Can a company offer both an HSA and a QSEHRA?
If your QSEHRA is structured correctly, it can operate alongside an employee HSA. As long as your QSEHRA is ‘limited-purpose’, then employees are allowed to receive both HRA reimbursements and HSA contributions.
Limited-purpose QSEHRAs are limited to reimburse the cost of health insurance premiums, preventive care, dental, vision, and long-term care premiums. This is actually very common for small business QSEHRAs, which often are employer-limited to only reimburse the cost of employee premiums.
Q: Do HSAs work with health sharing plans?
Some health sharing plans are structured to be HSA qualified, like the one offered by MPowering Benefits. This is possible by combining the health sharing plan with a compatible HSA-qualified MEC plan.
Having an HSA in addition to group health sharing gives your employees added protection against deductibles and out-of-pocket costs.
Q: What is the HSA contribution limit this year?
In 2024, the annual limit on HSA contributions will be $4,150 for individuals and $8,300 for families. This represents an increase of 7.8% and 7.1% from 2023, or about $300 for individuals and $550 for families.
Q: What’s the difference between an HSA and an FSA?
HSAs and FSAs (Flexible Spending Accounts) are similar in that they are both tax-deferred savings accounts. The primary difference between FSAs and HSAs is that FSA funds are owned by the employer who is sponsoring the plan. Meanwhile HSAs are owned entirely by the individual / employee.
Overall, HSAs are more flexible and portable than FSAs, and because the funds rollover from year to year, the overall financial value of an HSA is far greater to the employee.
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The Benefits of Contributing to a Small Business HSA
As the cost of insurance premiums has continued to rise, Health Savings Accounts have emerged as an effective way to stay insulated against unexpected costs. Here are the benefits of contributing to an employee HSA:
HSAs offer tax advantages to the employer
All contributions made towards employee HSAs are eligible for a federal tax deduction. As a benefit option, HSAs can save companies a lot of money on payroll taxes and FICA taxes as opposed to a salary increase.
HSAs offer tax advantages to the employee
Health savings accounts make it possible to save pre-tax dollars for health care expenses. This tax-advantaged savings structure makes HSAs a valuable part of any retirement portfolio, and therefore an attractive workplace benefit.
There is no contribution minimum
Unlike some health insurance benefits, there is no minimum requirement for contributing to an employee HSA. This makes employee HSAs a possibility for even the smallest of companies, who can start small and increase their contribution amounts over time.
Funds stay with the employees, even if they leave their job
HSAs are owned and administered by the employee. This means that they can take it with them if they change employers. This ‘portability’ adds to the HSAs overall value to the employee.
Many plans options are HSA-qualified
While most HSAs are paired with high deductible group insurance, they are now available alongside popular insurance alternatives. For example, small business HRAs can reimburse individuals for the cost of their own HSA-qualified coverage.
Even some health sharing plans can be compatible with HSAs, by combining them with low-cost MEC preventative care insurance.
How to Set up an HSA for Your Small Business
The process for setting up an employee health savings account is simple:
1. Determine your plan eligibility
The first step in creating an employee HSA is enrolling your team in an HSA-eligible plan option. For large employers, this is usually a group-sponsored health insurance plan.
Small employers with fewer than 50 employees are not required to offer insurance, but they can still offer an HSA-eligible option.
For example, business owners can reimburse their employees for the cost of HSA-qualified insurance through a small business HRA. Businesses that offer a group health sharing plan can also contribute to HSAs by encouraging their employees to enroll in low-cost HSA-qualified MEC coverage.
Related Read: “Health Insurance for Small Business: The Only Guide You’ll Ever Need”.
2. Decide how much to contribute
As the employer, you get to choose how much to contribute to the employee HSA. This can be $0, or it can be any amount up to the contribution maximum. Contributions made towards an employee’s HSA are income tax-deductible. In addition, any contributions made by the employee via payroll are not subject to payroll tax.
3. Encourage your employees to open an HSA
Unlike FSAs, HSAs are owned entirely by the individual, or in this case, the employee. The first step in this process is fully explaining the tax benefits of HSAs to your team. If your goal is to increase participation, be sure to go over the basics of how to use an HSA, and what expenses are covered.
The HSA creation process is fast and hassle-free. With most banks and HSA administrators, these accounts can be opened online in only about 15 minutes.
4. Work with an HSA Administrator to manage contributions & tax liability
If you choose to contribute towards an employee HSA, the entire process can be administered by the financial institution that opened the account. This includes preparing and delivering the appropriate tax documents as required by the IRA.
5. Provide the required documentation
The final step of setting up an HSA for your employees is providing the proper documentation. These include:
- A Plan document that describes the plan’s benefits, limits, rules, definitions, and contribution information.
- A Summary plan description (SPD), which goes into more detail about plan administration and the claim-filing process.
- Compliance confirmations, which shows that you are following the comparability rules regarding employee HSA access.
Most HSA administrators will provide you with all the paperwork you need to give to your employees.
What you Need to Know About Section 125 “Cafeteria Plans”
Section 125 plans are required if you want both the employee and the employer to make pre-tax HSA contributions.
These are commonly known as “cafeteria plans”, as employees are able to choose from a selection of benefits.
HSAs are one of several options usually included in a cafeteria plan. Insurance premiums, dental, vision, and other supplemental coverage can also be included.
Section 125 plans make it easier to deduct employee HSA contributions directly from payroll. In addition, HSA contributions made through a Section 125 plan are not subject to social security tax, Medicare tax, or unemployment tax. For some employers, this could lead to significant savings over their current benefits arrangement.
Not all businesses will benefit from offering a Section 125 plan. They come with complicated enrollment rules and minimum contribution requirements that make them incompatible for some smaller companies. It’s a good idea to talk to your advisor for a second opinion.
HSA Rules for Employer Contributions
It’s important for employers to play by the rules when it comes to HSA contributions. While the HSA rules for employer contributions are not very complicated, violating them could lead to tax penalties.
Contributing to your employee’s HSA is easy when you take the time to understand the basics.
How much can an employer contribute to an HSA?
For 2025, the HSA contribution limit is $4,300 for an individual, up from $4,150 in 2024. You can contribute up to $8,550 to a family HSA for 2025, up from $8,300 in 2024. When you turn 55, these limits go up by $1,000 each. An employer can contribute any amount of the total limit, but typically contributes a smaller portion with the employee covering the rest.
Do employer HSA contributions count towards the HSAs annual maximum limit?
Yes, the employer contribution counts towards the maximum limit.
What’s the average employer contribution to an employee HSA?
Average employer HSA contributions vary greatly depending on the size of the company. However, it’s not uncommon for businesses to start with a $500 contribution for individuals and a $1,000 contrion for family HSAs.
Can an employer contribute directly to an HSA? Or does it have to come from payroll?
The easiest way to make HSA contributions is through payroll. This is also the only way to keep the contributions tax-free. It’s possible to contribute to the account outside of payroll, but it would not be with pre-tax money.
Is it possible to make excess HSA contributions?
If you contribute more than the annual limit, you can expect to pay a 6% tax on the excess.
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Employer HSA Accounting and Recordkeeping
Are employer HSA contributions tax-deducatble?
Yes, employer HSA contributions are tax-deductible as a business expense. For employers, there is an additional benefit of not having to pay employment tax on that amount. Meanwhile, employee contributions aren’t subject to income tax, Medicare tax, or Social Security. The more employees who make monthly HSA contributions, the lower your total payroll taxes will be.
Can I record employer HSA contributions in QuickBooks?
Recording your employer HSA contributions into QuickBooks is an easy process that only takes a few minutes. If you’re using QuickBooks for payroll, you can find the “HSA Plans” option built into the software, so all you have to do is enter the basic info.
- Click the “Workers” menu, then “Employees”, then”Pay”. Under the “Deduction / Contribution” tab, you’ll see “HSA Plans”. From there, simply enter the “amount per period”, or total employee contribution.
How do I report employer HSA contributions on the W-2?
Even though employer HSA contributions aren’t subject to employment taxes, they still need to be reported on all employee W-2s. “Box 12” is the section of the W2 where you can enter total HSA contributions for the year (including both employer and employee contributions.
Accounting best practices for employer HSA contributions
When it comes to small business HSAs, the accounting best practices are just like any other financial aspect of your business.
That means:
- Understanding and complying with employer HSA contribution rules
- Staying up to date with employee HSA accounting and recordkeeping tasks
- Consulting with your financial advisors to find the best HSA-qualified group plans
The Different Ways to Contribute to an Employee HSA
HSAs are unique among all employer-sponsored health benefits becuase of their wide applicability. No matter how much you choose to compensate your employees for health care expenses, there is usually a way to make that benefit HSA-qualified.
Adding an HSA to your HRAs
In order to use a small business HRA like a QSEHRA, employees are required to maintain Minimum Essential Coverage (MEC). MEC coverage can be individually purchased, or it can be offered by the employer, and it is often times HSA-qualified.
By offering both a small business HRA and employee HSA contributions, you are greatly increasing the value of your benefits package without increasing what you’re spending on payroll.
Adding an HSA to your small group health insurance plan
For businesses with fewer than 50 employees, there is no requirement to offer health insurance benefits.
However, offering your employees access to a group health insurance plan is an effective way to build out your benefits package. It also keeps your employees happy, healthy, and according to some studies, more productive.
Contrary to what many small business CEOs believe, group insurance plans can be an affordable option for even the smallest of companies. In fact, businesses with fewer than 25 employees and an average salary of < $50K are eligible for the Small Business Health Care Tax Credit, which can be worth up to 50% of your total contributions.
If you are considering offering a small group health insurance plan, it is a good idea to make sure that at least some of your options are HSA qualified. Even if you choose not to contribute, it provides your employees with a valuable route to ongoing tax savings.
Adding an HSA to a group healthshare plan
Summary: Health Savings Accounts for Employees
As health insurance costs continue to rise, Americans will continue to seek out innovative and alternative ways to pay the bills. Health Savings Accounts are not brand new, but they’re now more accessible than ever, and small businesses are starting to reap the benefits.
Your Personal Benefits Manager can be your guide into the world of HSAs. Whether you still need to choose an HSA-qualified plan option or you’re looking for more info on how to set up an employee HSA, we can help.
Click here to schedule a free online appointment, or call 1-800-913-0172.
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