Thinking About Opening a Small Business Health Savings Account? What You Need to Know

Health Savings Accounts, or HSAs, have been around for nearly 20 years (they debuted in December 2003), and they have grown in popularity. If you are a small business thinking about opening a small business health savings account, here is what you need to know. While there’s plenty of time to make your company’s healthcare arrangements for 2025, it’s not too early to begin thinking about it.

Many businesses have adopted HSAs as their only healthcare option or one of the choices for employees. For small businesses, HSAs are a good way to ensure that employees have health coverage without busting the budget.

Basics

Today, assets in more than 33 million accounts exceed $100 billion. It’s projected that the number of HSAs will grow to 43 million by the end of 2025. It is a growing and viable option for many small businesses looking to provide health insurance.

In order to contribute to an HSA, the employee must be covered by a high-deductible health plan (HDHP) and cannot be on Medicare.

An HDHP, as the name implies, covers costs other than certain preventive care after a deductible has been met, so 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. The following chart shows the parameters for 2024 and what they’ll be in 2025 so you can plan now.

There is 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.

Handling HSAs for Your Staff

The law is very flexible when it comes to handling HSAs. 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. Sources show that 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 (explained above). 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 above (the plans vary from state to state or from the federal exchange). Employer contributions to HSAs do not get reported on employees’ W-2s.

Pending legislation to improve HSAs

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 (1158) 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 (currently each spouse must have a separate HSA). 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 (expenses not currently considered “qualified medical expenses:). 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.
• Stop Penalizing Working Seniors Act (H.R. 2769) 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.

Conclusion

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.

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