Health Savings Accounts (HSAs) have been a thing for almost two decades now, first appearing in December 2003. They’ve become quite popular, especially among small businesses. If you’re a small business owner considering an HSA, here’s what you need to know.
It’s never too early to start planning your company’s healthcare for 2025. Many businesses have chosen HSAs as their sole healthcare option or as one of several choices for their employees. For small businesses, HSAs are a great way to provide health coverage for employees without breaking the bank.
As of now, there are over 33 million accounts with assets exceeding $100 billion. By the end of 2025, it’s expected that the number of HSAs will increase to 43 million. This makes HSAs a growing and viable option for small businesses looking to provide health insurance.
To contribute to an HSA, an employee must be covered by a high-deductible health plan (HDHP) and not be on Medicare. An HDHP covers costs other than certain preventive care after a deductible has been met, which means premiums are much lower than traditional group health plans. From a tax perspective, an HDHP is health insurance that has a minimum annual deductible and a maximum out-of-pocket limit.
There’s a cap on what can be contributed annually to HSAs. For 2024, the maximum amount is $4,150 for self-only coverage and $8,300 for family coverage. If the employee is 55 or older, an additional $1,000 is permitted. However, spouses must have separate HSAs for both to make the additional contribution. Employees handle their own HSAs; employers aren’t responsible for them. This means that it’s up to employees to decide whether, when, and for what to take distributions. Those for qualified medical expenses are tax-free; those for non-qualified expenses are subject to a 20% penalty unless the owner is age 65 or older.
When it comes to handling HSAs for your staff, the law is very flexible. Here are some ways to do it:
- The employer offers an HDHP and makes no contributions to employees’ HSAs; they contribute what they want and claim a tax deduction on their personal federal income tax returns, whether or not they itemize other deductions.
- The employer offers an HDHP and makes a partial contribution to employees’ HSAs. In 2022, the average employer contribution was $869 per employee. Employer contributions must be made on a nondiscriminatory basis. The employer deducts the contributions; employees are not taxed on them and there are no payroll taxes on contributions.
- The employer offers an HDHP and makes a full contribution up to the annual limit. This could be helpful in a small family-owned business, assuming the company can afford to make the contributions.
- The employer has no HDHP but makes a contribution to employees’ HSAs if they are eligible. This means they are covered by an HDHP through another source. This can be any plan through the government Marketplace that meets the HDHP definition. Employer contributions to HSAs do not get reported on employees’ W-2s.
Because of their popularity and the potential benefit of encouraging savings for health care purposes, there have been various proposals in Congress to expand the use of HSAs. Two recent proposals worth noting:
- The Health Savings Act of 2023 would expand HSAs in several ways. If enacted, it would allow both spouses age 55 and older to make catch-up contributions to the same account. It would also allow funds in HSAs to be used to purchase insurance and pay for nutritional supplements, membership at a fitness facility, and exercise equipment. And it would increase the tax-deductible contribution limit to be the same as the out-of-pocket limit for HSA-eligible health plans, essentially doubling the deductible contribution amount.
- The Stop Penalizing Working Seniors Act would allow contributions for Medicare-eligible individuals who are age 65 or older if their entitlement to Medicare benefits is limited to hospital insurance benefits under Medicare Part A.
In the coming months, decide whether you want to offer HSAs and the extent of contributions you’ll make. Monitor developments in Congress to note changes in the rules for HSAs. Discuss all of this with your CPA or other adviser to factor in the cost when preparing your 2024 budget. You can find more details about HSAs in IRS Publication 969.
