As a small business owner, controlling healthcare expenses for both yourself and your employees can be tough. One effective strategy to 
consider is a Health Savings Account (HSA). HSAs provide significant benefits, helping to reduce healthcare costs while offering valuable tax advantages. If you already have an HSA, it’s worth reviewing how they work, especially with the IRS recently announcing the inflation-adjusted limits for 2025.
HSA Overview
HSAs offer a tax-efficient way to save for medical expenses, with contributions made either by the individual or their employer. To qualify, employees must not be enrolled in Medicare or claimed as a dependent on another person’s tax return.
Key Tax Benefits:
- Employee contributions to an HSA are deductible, within specific limits.
- Employer contributions are not taxed for employees.
- Earnings on the HSA funds grow tax-free, allowing for accumulation year after year.
- Withdrawals for qualified medical expenses are also tax-free.
- Employers do not pay payroll taxes on employee contributions through payroll deductions.
Important 2024 and 2025 HSA Limits
To be eligible for an HSA, individuals must have a “high-deductible health plan.” For 2024, the minimum annual deductible for such plans is $1,600 for self-only coverage or $3,200 for family coverage. These amounts increase to $1,650 and $3,300, respectively, in 2025.
The contribution limits for 2024 are:
- $4,150 for self-only coverage
- $8,300 for family coverage
These limits will rise in 2025 to:
- $4,300 for self-only coverage
- $8,550 for family coverage
Additionally, the maximum annual out-of-pocket expenses for covered benefits in 2024 are:
- $8,050 for self-only coverage
- $16,100 for family coverage
For 2025, these will increase to:
- $8,300 for self-only coverage
- $16,600 for family coverage
If an individual (or their covered spouse) is 55 or older by the end of the tax year, they may make an extra “catch-up” contribution of up to $1,000 for both 2024 and 2025.
Employer Contributions to HSAs
When an employer contributes to an employee’s HSA, these contributions are considered employer-provided coverage under a health plan and are not taxed as income, within the allowable contribution limits. There is no “use-it-or-lose-it” rule, meaning the funds can grow over time. However, employers who make contributions must ensure they offer similar contributions to all eligible employees within the same year, or they may face a 35% tax on the total employer contributions.
Using HSA Funds for Medical Expenses
Employees can use their HSA funds to pay for qualified medical expenses, such as doctor’s visits, prescriptions, chiropractic care, and long-term care insurance premiums. If HSA funds are used for non-medical expenses, the withdrawal will be taxable and subject to an additional 20% penalty, unless the withdrawal occurs after age 65 or in the event of death or disability.
HSAs provide a flexible, tax-advantaged way to manage healthcare expenses, though the rules can be intricate. If you have any questions or want to discuss offering HSAs to your employees, feel free to contact us.
