Health Savings Account (HSA)

An HSA is a savings account owned by the plan participant (i.e. employee) into which the employee and employer can deposit money to use for qualified health expenses. The contributions are tax-free in the year they are made, they grow tax-free, and distributions made for qualified medical expenses are tax-free as well. Since these accounts are owned by the employee, their account balances automatically roll over from year-to-year and at age 65 they function as a retirement account. In order to offer an HSA on a pre-tax basis, employers must have an active Section 125 Cafeteria Plan. Here are the important details.

HSA employee eligibility requirements

Employees are eligible to contribute to an HSA if:

They’re enrolled in a High Deductible Health Plan (HDHP) and it’s their only insurance coverage.
They’re not enrolled in Medicare. No one else can claim them as a dependent on their tax return.
The account owner or their spouse doesn’t have or use a General Purpose FSA (Flexible Spending Account). They are allowed to have a Limited Purpose FSA for dental and vision, or a Dependent Care FSA.
They’re aged 18 years or older.

What’s an HDHP?

The IRS sets the annual deductible and out-of-pocket maximum for HDHPs each year.

In 2024, a health insurance plan is considered an HDHP if:

The annual deductible is at least $1,600 for individuals and $3,200 for families.
The annual out-of-pocket maximum is no greater than $8,050 for individuals and $16,100 for families.

In 2025:

$1,650 minimum deductible for individual coverage and $3,300 for families.
$8,300 out-of-pocket maximum for individual coverage and $16,600 for families.

Why offer it?

Helps employers contain health insurance costs. HDHPs typically have the most affordable annual premiums of traditional health insurance plans. When paired with an HSA, employees are further incentivized to choose this more cost-effective option.
Helps lower employer FICA taxes. Since employee HSA contributions are made pre tax, they lower employers’ payroll tax obligation.
Helps lower employer business taxes. Employer contributions to employee HSAs can be deducted as a business expense.

Cost-effective way to meet the needs of a diverse workforce. The HSA enables employees to spend money on the medical care and services they need and value instead of paying more on a monthly basis for comprehensive coverage they might not need.
Contributions can be invested to grow at the rate of the market.
Can be used as a retirement account. After 65 years of age, account holders can use their HSA funds for anything, just like a 401(k) or IRA.
Employees retain access to their accounts no matter what. If an employee leaves the company or no longer has an HDHP as their only coverage, they can still use previous contributions for qualified medical expenses.