How to set up a Small Business HSA [2025 Update
By Christine Corsini – Updated Sept 8th, 2025
Reviewed by Mike Montes – Fact checked by Leslie Jablonski
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These personal medical savings accounts are triple tax advantaged, creating one of the best investment tools available.
Tax Deductible & Funds Rollover
Not only are HSA contributions income tax deductible for the employer but HSA funds also roll over year to year and belong entirely to the employee.
This makes HSAs for small business a very valuable benefit for prospective talent.
Step-by-Step Guidance
This guide will explain the nuts and bolts of how to set up an HSA for small business, along with step-by-step instructions on setting up an HSA, working with group health insurance plans, and HRAs.
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
- Earnings and dividends grow tax-free
- Withdrawals are tax-free when used to pay for qualified medical expenses
Contributions to Employee HSAs are Income Tax-Deductible
Employers and employees alike benefit from tax savings. Contributions through payroll are not subject to payroll taxes.
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
Small business owners can offer an HSA alongside a high-deductible health plan, group insurance, or a health sharing plan paired with a compatible MEC plan.
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 account used to save and pay for qualified medical expenses. All contributions to HSAs are tax deductible, and the funds are allowed to grow on a tax-deferred basis.
HSAs are available to employees with a high-deductible health plan, including group insurance, ICHRAs, and some healthcare 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.
Available to employees with a high-deductible health plan, including group insurance, ICHRAs, and some healthcare sharing plans.
Q: Can I have an HSA if I’m self-employed?
Yes, if you’re enrolled in a high-deductible health plan (HDHP). You are not eligible if:
- You’re covered by a non-HSA-qualified plan (e.g., your spouse’s insurance)
- You’re dependent on someone else’s tax return
- You’re enrolled in Medicare or Medicaid
Q: Which businesses can offer / contribute to employee HSAs?
Any business whose employees have access to an HSA-qualified health insurance plan can offer an HSA. This includes companies using HRAs or MEC coverage with health sharing.
Even businesses with only a handful of employees can contribute to employee HSAs.
Q: Who contributes to an employee HSA?
Both the employer and the employee can contribute. Either party can fund part or all of the annual maximum.
Q: Can you deduct HSA contributions through payroll?
Yes. Contributions deducted through payroll are not subject to income or payroll taxes.
Q: What is a high-deductible health plan?
An HDHP is required to open an HSA. These health insurance plans are advertised as HSA-qualified.
HDHPs can also be reimbursed through HRAs or combined with MEC plans for compatibility with health savings accounts.
Q: What is a Section 125 cafeteria plan?
Section 125 plans allow employees to choose how to spend pre-tax benefits. These plans simplify how to set up an HSA account for small businesses and increase tax savings.
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?
- 2025: $4,300 (individual) / $8,550 (family)
- Catch-up (age 55+): additional $1,000
Q: What’s the difference between an HSA and an FSA?
Flexible Spending Accounts (FSAs) are owned by the employer and have use-it-or-lose-it rules. Health savings accounts (HSAs) are employee-owned and funds roll over, making them more valuable long term.
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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
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. They’re considered a business expense and exempt from payroll taxes. Employees avoid income tax as well.
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?
Yes. Use the “HSA Plans” tab under Payroll > Workers > Deductions to log employer and employee contributions.
How do I report employer HSA contributions on the W-2?
Report in Box 12, including both employer and employee amounts.
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.
Best Practices
- Follow HSA contribution rules
- Maintain clear hsa accounting records
- Review eligibility plans annually
The Different Ways to Contribute to an Employee HSA
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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Summary: This page explains how small businesses can set up and manage Health Savings Accounts (HSAs) for their employees. It covers eligibility, contributions, tax rules, and how HSAs work with other health plans.
Key points:
- HSAs are available to employees with high-deductible health plans.
- Employers and employees can both contribute, up to the annual IRS limit.
- Contributions are tax-deductible and funds roll over year to year.
- Self-employed individuals can also open an HAS if eligible.
- HSAs can work alongside group plans, HRAs, and some health sharing plans.
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