Health Savings Accounts (HSAs): A Complete Guide for Employers

As healthcare costs continue to rise, Health Savings Accounts (HSAs) have become an essential part of a cost-effective and competitive benefits package for businesses offering High-Deductible Health Plans (HDHPs).

For employers, HSAs reduce payroll taxes, lower overall healthcare costs, and improve employee retention by offering a tax-advantaged way to save for healthcare expenses. For employees, HSAs provide a powerful tool for managing medical expenses, saving for future healthcare needs, and even planning for retirement.

This guide will help you understand how HSAs work, their benefits for both employees and employers, and how to set up and manage an HSA program successfully.

A Health Savings Account is a tax-advantaged savings account for employees enrolled in an IRS-qualified high deductible health plan (HDHP). It offers these features to participants:

• Pre‑tax contributions: Employees contribute via payroll deductions before taxes.
• Tax-free growth: Investment gains or interest accumulate tax-free.
• Qualified withdrawals: Funds used for eligible medical expenses are tax-free.
• Portability: Employees keep their account even if they change jobs.
• Rollover: Remaining account balances carry over year to year—unlike FSAs, there is no “use-it or lose-it” policy.

HSAs provide both immediate flexibility for healthcare spending and long-term savings potential.

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over each year and remain with the employee even if they leave the company. This makes HSAs an attractive long-term financial tool for employees.

Offering an HSA-compatible HDHP allows employees to save for both immediate and future healthcare costs. Here’s how an HSA benefits them:

HSAs allow employees to pay for medical, dental, and vision expenses tax-free. Because contributions are pre-tax, employees save money on every dollar they set aside for healthcare.

Contributions to an HSA are tax-free, which means employees can reduce their taxable income and increase their take-home pay.

Unlike FSAs, which often have a “use it or lose it” rule, HSAs allow employees to roll over unused funds year after year, building a financial cushion for future medical expenses.

HSA funds can be invested in stocks, bonds, or mutual funds, allowing employees to grow their savings tax-free over time. After age 65, employees can withdraw HSA funds for non-medical expenses without penalty (though they will be taxed like a traditional 401(k) or IRA).

HSAs belong to the employee, not the employer. Employees can keep their HSA even if they change jobs or retire.

Key Takeaway for Employers: Employees value HSAs because they offer immediate tax savings, long-term financial growth, and increased healthcare affordability.

Since HSA contributions are pre-tax, employers save on FICA (Social Security & Medicare) payroll taxes.

Example: If an employee contributes $3,000 to their HSA, the employer saves approximately $229 in payroll taxes (assuming a 7.65% FICA tax rate).

HDHPs paired with HSAs generally have lower premiums than traditional PPO or HMO plans. This can reduce employer healthcare expenses while still providing employees with a valuable healthcare benefit.

If the company contributes to employees’ HSAs, those contributions are tax-deductible as a business expense. Many companies offer HSA matching contributions to encourage participation.

HSAs empower employees to take charge of their healthcare expenses, encouraging cost-conscious medical decisions. Employees also appreciate long-term savings benefits, making HSAs a valuable retention tool.

A well-structured HSA program makes your benefits package more competitive, helping you attract and retain skilled employees, especially in tech-driven and cost-conscious industries.

Key Takeaway for Employers: HSAs offer significant financial benefits for businesses while improving employee well-being and job satisfaction.

Implementing an HSA program requires more than simply offering an account—it demands a thoughtful, compliant approach to plan design, payroll integration, education, and ongoing administration. Below is a comprehensive breakdown of what employers must do to offer HSAs successfully and stay compliant with federal regulations.

The foundation of any HSA program is the health plan itself. Only employees enrolled in a qualifying HDHP can contribute to an HSA.

To be considered HSA-compatible, the HDHP must meet specific IRS requirements each year:

Coverage Type	Minimum Deductible	Maximum Out-of-Pocket Limit
Individual	$1,700	$8,500
Family	$3,400	$17,000

Employers should work with insurance providers to ensure their health plan meets IRS HDHP requirements.

Important compliance points:

• No first-dollar coverage: The HDHP cannot pay for non-preventive services until the deductible is met.
• Preventive care exception: Preventive services (e.g., vaccinations, screenings) can be covered without cost-sharing.
• Embedded deductibles: For family coverage, each family member must meet their individual deductible before coverage begins, unless otherwise structured.

Best practice: Review your plan documents with your insurance broker or carrier to confirm HSA eligibility every year—thresholds change annually, and non-compliance disqualifies all participants from contributing to HSAs.

An HSA custodian is the financial institution responsible for holding HSA funds and processing account transactions. Employers can either:

• Partner with a preferred administrator to centralize contributions and streamline employee support.
• Allow employees to choose their own custodian (less common due to administrative complexity).

Key features to evaluate in an HSA administrator:

• Payroll integration: Allows seamless, pre-tax contributions via automated deductions.
• Investment options: Supports mutual funds, ETFs, and other investment vehicles once account minimums are met.
• Low fees: Consider account maintenance, transaction, and investment fees.
• User experience: Employee portal, mobile access, and customer support.

Examples of leading HSA providers: Fidelity, HealthEquity, HSA Bank, Lively.

Best practice: Choose a vendor that integrates with your payroll and benefits platform to reduce administrative errors and compliance risk.

To maximize the tax benefits for employees and employers, HSA contributions should be deducted on a pre-tax basis through a Section 125 cafeteria plan.

Steps to implement pre-tax deductions:

• Establish or update your Section 125 plan to include HSA contributions.
• Set up payroll codes and deduction schedules for employee contributions.
• Coordinate with your HSA custodian for timely deposit of funds into employee accounts.
• Ensure year-to-date tracking for contribution limit compliance.

Employer tax benefit: Contributions reduce gross wages subject to payroll taxes, saving the employer 7.65% in FICA taxes per dollar contributed.

Best practice: Automate payroll deductions and schedule regular reconciliation reports to match deposits with employee pay records.

Determine and Manage Employer Contributions

Employers may choose to contribute to employee HSAs to encourage adoption and enhance the perceived value of the program.

Types of employer contributions:

• Flat contributions: A fixed dollar amount per year or per pay period.
• Matching contributions: A percentage of the employee’s contributions, often capped.

Example Structures:

• $500 annually for individuals, $1,000 for families.
• 100% match up to $1,000 per year.
• Monthly match of $1 for every $1 contributed by the employee (up to a limit).

Important compliance tip: Employer contributions must be comparable if not made through a Section 125 plan, meaning similarly situated employees (e.g., same coverage tier) receive equal contributions. Otherwise, the plan may violate IRS nondiscrimination rules.

Best practice: Communicate clearly whether employer contributions count toward the IRS annual limit (they do) and provide visibility through employee pay stubs or portal dashboards.

Many employees don’t fully understand HSAs or how to use them. Education is key to driving adoption and maximizing plan value.

Education topics to cover:

• How pre-tax contributions reduce taxable income
• Eligible expenses (including medical, dental, vision, and over-the-counter medications)
• Rollover rules—funds never expire
• How to invest HSA funds for long-term savings
• Withdrawal rules—qualified medical expenses are tax-free; non-qualified withdrawals are penalized before age 65

Educational formats:

• Onboarding sessions and benefits orientation
• FAQs and digital guides
• Intranet content and videos from your HSA administrator

Best practice: Offer annual refreshers before open enrollment and provide a contact for questions year-round.

An HSA program isn’t “set it and forget it.” Employers must proactively track compliance and adjust processes annually.

Annual compliance tasks:

• Check IRS updates to HDHP deductible thresholds and contribution limits.
• Communicate new limits to employees during open enrollment.
• Review HSA administrator performance (fees, integration, support).
• Ensure accurate W-2 reporting of employer contributions in Box 12, code W.

Ongoing checks:

• Confirm eligibility of employees contributing to HSAs (e.g., they are not enrolled in Medicare or another disqualifying plan).
• Monitor catch-up contributions for employees age 55+.
• Prevent over-contributions, which may lead to excise taxes.

Best practice: Assign a dedicated HR or payroll team member to oversee HSA compliance and coordinate with finance and benefits vendors annually.

The IRS sets annual contribution limits for HSAs, which include both employer and employee contributions.

Coverage Type	Annual Contribution Limit
Individual	$4,400
Family	$8,750
Catch-Up (55+ years old)	Additional $1,000

Should Your Business Offer an HSA Program?

When HSAs Make Sense

• You offer or plan to offer an HDHP that meets IRS requirements.
• You want to provide a tax-advantaged benefit with long-term value.
• You aim to reduce payroll taxes and healthcare costs while improving retention.

Risks to Consider

• Compliance with IRS deductible and out-of-pocket thresholds
• Annual updates to contribution limits
• Administrative overhead for setup, education, and payroll coordination

• HSAs reduce payroll taxes and lower healthcare expenses.
• Employees appreciate the long-term savings benefits of HSAs.
• Pairing an HDHP with an HSA creates a more affordable benefits package.
• Employer contributions are tax-deductible and improve employee retention.

Final Thoughts

A well-implemented HSA program paired with an HSA-eligible HDHP can deliver significant financial value—for both your business and your employees. It offers tax savings, encourages smarter healthcare spending, and creates long-term fiscal resilience for employees. With proper setup, clear communication, and ongoing review, HSAs can elevate your benefits strategy while protecting your bottom line.

By implementing an HSA program, businesses can offer cost-effective healthcare benefits that appeal to today’s workforce while keeping expenses under control.