As a small business owner, managing health care expenses — for both you and your employees — can be difficult to navigate. Looking for an effective solution? Consider a Health Savings Account (HSA). HSAs provide a range of benefits, including tax advantages, that can help reduce health care costs. If you already have an HSA, now is a great time to review how it works, as the IRS has announced inflation-adjusted limits for 2025.
Understanding HSAs
For those who qualify, HSAs offer a tax-advantaged way to set aside funds (or have their employers contribute) to cover future medical expenses. To be eligible, employees cannot be enrolled in Medicare or claimed as a dependent on someone else’s tax return.
Key Tax Benefits:
Withdrawals for qualified medical expenses are tax-free.
Contributions made by participants are tax-deductible, up to certain limits.
Employer contributions are not considered taxable income for employees.
Earnings within an HSA grow tax-free, allowing funds to accumulate over time.
Employers are not required to pay payroll taxes on employee HSA contributions made through payroll deductions.
HSA Limits for 2024 and 2025
To qualify for an HSA, an individual must be covered by a high-deductible health plan (HDHP). The minimum deductible requirements have increased since last year; take a look below.
2024: $1,600 for self-only coverage; $3,200 for family coverage
2025: $1,650 for self-only coverage; $3,300 for family coverage
On the contrary, contribution limits for deductible contributions are also increasing:
2024: $4,150 for self-only coverage; $8,300 for family coverage
2025: $4,300 for self-only coverage; $8,550 for family coverage
Consequentially, out-of-pocket expense limits for covered benefits are rising:
2024: $8,050 for self-only coverage; $16,100 for family coverage
2025: $8,300 for self-only coverage; $16,600 for family coverage
Individuals 55 or older (including covered spouses) can make additional catch-up contributions of up to $1,000 for both 2024 and 2025.
Employer Contributions to HSAs
If an employer contributes to an employee’s HSA, those contributions are treated as “employer-provided medical coverage” and are excluded from the employee’s gross income — up to the allowed deduction limit. Unlike other benefits, HSAs do not have a “use-it-or-lose-it” rule, meaning funds can accumulate indefinitely.
However, employers choosing to contribute must generally make comparable contributions to all eligible employees within the same calendar year. Failure to do so may result in a 35% excise tax on the total contributions made.
Using HSA Funds for Medical Expenses
Employees can withdraw HSA funds to pay for qualified medical expenses, which typically include doctor visits, prescriptions, chiropractic care, and long-term care insurance premiums.
Withdrawals made for non-qualified expenses are subject to income tax and an additional 20% penalty—unless the account holder is age 65 or older, disabled, or deceased.
HSAs offer a flexible, tax-advantaged way to manage health care expenses, but they come with specific rules. If you’re considering offering HSAs to your employees or have questions about how they work, reach out to us for guidance.