How to Set Up a Health Savings Account for Your Small Business

Health Savings Accounts (HSAs) provide a tax-advantaged savings and spending vehicle for healthcare expenses, offering benefits for both employees and small businesses. For a small business, offering an HSA program can enhance employee benefits packages, potentially attracting and retaining talent. These accounts are owned by the employee, meaning they are portable and remain with the individual even if they change employers or retire. Contributions to HSAs, whether made by the employer or employee, often receive favorable tax treatment, and funds can be used for qualified medical expenses tax-free.

Prerequisites for Offering Health Savings Accounts

Before a small business can offer Health Savings Accounts, certain requirements must be met concerning the health insurance plan and employee eligibility. A High Deductible Health Plan (HDHP) is a mandatory component for employees to be eligible for HSA contributions. The Internal Revenue Service (IRS) defines an HDHP by specific minimum deductible amounts and maximum out-of-pocket limits that change annually. For 2025, an HDHP must have a minimum deductible of $1,700 for self-only coverage and $3,400 for family coverage.

The maximum out-of-pocket expenses, including deductibles, co-payments, and co-insurance, cannot exceed $8,550 for self-only coverage or $17,100 for family coverage in 2025. These limits apply to amounts paid for covered medical expenses, but they do not include premiums. Businesses must ensure their offered health plan meets these criteria.

Beyond the HDHP requirement, individual employees must satisfy specific IRS criteria to be eligible HSA account holders. An employee must not be covered by any other health insurance plan that is not an HDHP, with some exceptions for specific permitted coverage like dental or vision benefits. They cannot be enrolled in Medicare, nor can they be claimed as a dependent on someone else’s tax return.

Selecting an HSA Provider

Choosing the right financial institution to administer Health Savings Accounts for your business and its employees requires careful consideration. The chosen provider will manage the individual HSA accounts, facilitate contributions, and provide access for employees to manage their funds. Evaluating a provider’s integration capabilities is a factor, as seamless integration with existing payroll or benefits administration systems can streamline administrative tasks for the business. This integration simplifies employer contributions and employee payroll deductions.

Fees associated with HSA accounts can vary among providers and should be thoroughly compared to minimize costs for employees and the business. Common fees might include monthly account maintenance fees, investment fees if employees choose to invest their HSA funds, and transaction fees for certain activities. Understanding the fee structure helps in selecting a cost-effective solution.

Many HSA providers offer investment opportunities for funds that exceed a certain balance, allowing account holders to grow their savings over time. Businesses should research the variety and quality of investment options available, considering factors such as investment fund choices, associated fees, and historical performance. A robust investment platform can be a valuable feature for employees.

Employee experience is another consideration, encompassing user-friendly online portals, mobile applications, and responsive customer service. These features enable employees to easily access account information, monitor balances, submit claims, and manage their investments. The level of support the provider offers to the business for initial setup and ongoing administration impacts the employer’s administrative burden. A provider with dedicated employer support can help navigate compliance requirements and address any operational questions.

Establishing and Funding Employee Health Savings Accounts

Once an HSA provider has been selected, the next step involves setting up individual accounts and managing contributions. Businesses work directly with their chosen HSA provider to establish individual Health Savings Accounts for each eligible employee. This process typically involves providing necessary employee information to the provider to facilitate account creation. The provider will then guide employees through their onboarding steps.

Employer contributions to HSAs are optional but offer a benefit to employees and are tax-deductible for the business. These contributions are typically made directly to the HSA provider on behalf of employees, often on a per-pay-period basis or as a lump sum. The business can choose to contribute a fixed amount, a matching contribution, or a combination.

Employees can also contribute to their HSAs, primarily through pre-tax payroll deductions, which reduces their taxable income. Employees can also make direct contributions to their HSA.

The IRS sets annual contribution limits for HSAs, which include both employer and employee contributions. For 2025, the maximum contribution for self-only coverage is $4,150, and for family coverage, it is $8,300. Individuals aged 55 and over are permitted to make an additional catch-up contribution of $1,000 annually. Businesses should communicate these limits to employees to ensure contributions do not exceed the permissible amounts.

Ongoing Management and Compliance

After the initial setup and funding of Health Savings Accounts, businesses have continuous administrative and compliance responsibilities. A primary responsibility involves reporting HSA contributions to the IRS. Businesses are required to report all employer contributions made to an employee’s HSA on Form W-2, in Box 12, using code W.

Managing HSA accounts effectively also involves handling changes in employee status. For new hires, businesses must facilitate their enrollment into the HSA program, ensuring they meet eligibility criteria and assisting with account establishment. Conversely, for employees who terminate employment or experience a change in eligibility status, businesses need to adjust contributions accordingly. While the HSA remains with the employee, the employer’s contribution obligations cease, and any payroll deductions for employee contributions should be stopped.

Staying compliant with evolving IRS rules and guidance is important for maintaining an HSA program. This includes monitoring changes to HDHP definitions, annual contribution limits, and eligibility requirements. The IRS periodically updates these figures and rules, and businesses must adjust their practices to remain in compliance. Regular reviews of the HSA program ensure that it continues to meet all regulatory standards.

Regular communication with employees about their HSA benefits, contribution limits, and qualified medical expenses helps them manage their accounts responsibly. Providing access to resources from the HSA provider can also empower employees to make informed decisions about their healthcare savings.