What to know about HSAs for small businesses

Health savings accounts (HSAs) are a tried-and-true employee perk for small businesses looking to offer healthcare benefits without breaking the bank. These tax-advantaged accounts help workers save for medical expenses while giving employers a cost-effective way to enhance their benefits package, but they aren’t the best fit for every business.

What is a health savings account?

An HSA is a special personal savings account funded with pre-tax dollars that employees can use to pay certain medical expenses. In other words, it’s like a 401(k) for healthcare.

But there’s a catch: HSAs are only available to those enrolled in a high-deductible health plan (HDHP). These plans trade lower premiums for higher out-of-pocket costs. So, HSAs have become crucial for covering expenses like deductibles, prescriptions and doctor visits.

What makes HSAs a standout choice? The triple tax advantage:

• Tax-free contributions: Employees can contribute pre-tax dollars, reducing their taxable income.
• Tax-free growth: HSAs aren’t a “use-it-or-lose-it” deal. HSA funds can be invested (mutual funds, stocks, bonds) and left to grow tax-free, much like a retirement fund.
• Tax-free withdrawals: As long as the money is used for qualified medical expenses, it’s never taxed.

Why offering HSAs is a win for small businesses

Small businesses are always looking for ways to offer significant benefits without overspending. A health savings account for a business checks all the boxes. These accounts can be a smart move for a few reasons.

HSAs save everyone money

Employers get a tax deduction for contributions, and employees lower their taxable income. Pair that with an HDHP’s lower premiums, and you have a cost-effective way to offer health benefits.

HSAs put employees in control

HSAs give employees more say in how they spend their healthcare dollars. Whether they want to save for a major medical procedure, cover everyday expenses like prescriptions and doctor visits, or invest their HSA balance for future healthcare needs, the flexibility is in their hands.

HSAs make your benefits package more competitive

If you want to stand out from competitors, offering an HSA can be a great way to sweeten the deal without resorting to higher starting salaries as the only way to attract top talent.

When should your business consider an HSA?

HSAs aren’t the right fit for every business, but they’re worth considering if:

• You want to offer health benefits without sky-high costs. If traditional health plans feel too expensive, a high deductible health plan and HSA can be a more budget-friendly alternative.
• Your employees are comfortable managing healthcare expenses. Because HSAs require employees to handle more out-of-pocket costs upfront, they work best for employees who can incorporate those costs into their budget.
• You want to help employees save for the future. Unlike flexible spending accounts (FSAs), HSAs roll over indefinitely, making them a great long-term tool for building savings.

Which businesses should avoid an HSA?

HSAs can be a great tool, but here are a few cases where they might not be the right fit for your business:

• Your employees have high healthcare needs. If your team relies on frequent doctor visits, ongoing prescriptions or regular treatments, the HDHP/HSA combo might not provide the needed coverage. A more traditional health plan with lower out-of-pocket costs could be better.
• Your team prefers a benefits package that’s easy to manage. HSAs require employees to track contributions, understand tax implications and manage eligible expenses. A standard group health plan may work better if your employees prefer a more straightforward approach.
• Your workforce is largely lower-income. High-deductible health plans require employees to pay more out of pocket before insurance kicks in, which can strain them financially. An HSA would be less practical in this situation.

Before committing to an HSA, consider your employees’ needs and financial situations. A well-intentioned benefit isn’t genuinely beneficial if it doesn’t align with your team’s realities.

HSA vs. FSA: What’s the difference?

HSAs and FSAs offer tax benefits for medical expenses, but some essential differences exist between their portability and handling of unused funds:

HSAs give employees more control over their healthcare savings by allowing them to invest their funds, much like a retirement account. This allows employees to grow their savings and build a financial cushion for future medical expenses.

FSAs, on the other hand, don’t offer investment options and require employees to use their funds within the plan year, making them less ideal for long-term healthcare planning.

Another key difference is that HSAs stay with the employee, no matter where they work. If an employee with an FSA leaves their job, unused funds typically return to the company. This makes HSAs a more attractive option for employees who want a benefit they can take with them throughout their careers.

In short, a health savings account for a business could be the better choice if flexibility and long-term savings matter most. However, an FSA might be better if employees prefer a simpler, spend-it-now option.

How to set up an HSA for your small business

If you’ve decided an HSA is right for your business, here’s what you need to do to set one up.

1. Choose an HSA-eligible HDHP

HSA-eligible plans must meet the IRS minimum deductible requirements for 2025. The amounts are $1,650 for individuals and $3,300 for families, with out-of-pocket maximums of $8,300 and $16,600, respectively. Insured individuals must also meet their deductible before their insurance coverage starts.

2. Pick an HSA provider

Banks, credit unions and financial institutions offer HSAs. To make it easy, you can start your search by checking if your health insurer partners with an HSA provider.

From there, compare fees, investment options and user experience. Also, consider what other benefits providers offer, such as a debit card for account holders, a designated mobile app and educational materials to help employees maximize their HSA.

3. Establish an HSA cafeteria plan

Setting up an HSA cafeteria plan lets employees make pre-tax contributions directly from their paychecks. To stay compliant, you must follow IRS guidelines, including having a formal plan document and offering fair access to all employees. Working with a benefits specialist can ensure your plan is structured correctly and maximizes tax advantages.

4. Set contribution rules

Decide if you’ll contribute to employees’ HSAs and, if so, how much. The cap is $2,150. Some businesses match a percentage of employee contributions to encourage participation.

5. Educate employees

Many employees don’t fully understand how HSAs work. Provide clear, simple guidance on how they can use and grow their HSA funds. The HR department can fill this role, although you might be able to do it yourself using your HSA provider’s educational materials.

6. Integrate it with payroll

Work with your payroll provider to set up pre-tax contributions, making it easy for employees to participate or make changes throughout the year.

The bottom line

If you’re looking for a way to provide meaningful health benefits without blowing your budget, a health savings account for a business might be the answer. With tax perks, cost savings and long-term flexibility, it’s a win for both businesses and employees. Just make sure an HDHP fits your workforce before you jump in.

If you’re ready to move forward, start comparing HSA providers and educate your team on how to make the most of this valuable benefit.

Frequently asked questions

• Can a business have an HSA account?

  No, businesses can’t open HSAs for themselves. However, they can set up an HSA program for employees by offering an eligible HDHP and facilitating payroll contributions.

• Is an HSA worth it for self-employed individuals?

  Yes, because it allows self-employed people to enjoy tax deductions while building savings for medical expenses. You’ll need to sign up for an HDHP to qualify.

• Can 1099 employees open an HSA?

  Yes. Independent contractors with an HDHP can open and contribute to an HSA like traditional employees.

• Can S Corp or C Corp owners contribute to an HSA?

  If you’re a C Corp owner and an employee, you can contribute to an HSA pre-tax like any other employee. If you’re an S Corp owner owning more than 2 percent of your S Corp, you can’t contribute pre-tax through the business. Instead, you contribute post-tax and deduct it from your personal tax return.