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4 Min. Read

How to Set Up HSA for Small Business Owners

How to Set Up HSA for Small Business Owners

If you’re running a small business, health care costs are a very hot topic. Health savings accounts, or HSAs, are a great way to help your employees who have a high-deductible health plan. Keep reading to learn everything you need to know about HSAs!

Here’s What We’ll Cover:

What Are Health Savings Accounts?

How to Set Up an HSA For Your Employees

Frequently Asked Questions About HSAs

Key Takeaways

What Are Health Savings Accounts?

Health savings accounts, or HSAs, are tax-favored savings accounts set up for employees by businesses. They are used by individuals to pay for qualifying medical expenses. HSAs used in unison with high-deductible health plans means lower health insurance premiums. Lower insurance premiums can really help your employees with their finances. Contributions to HSAs can be made on a pre-tax basis, meaning that they won’t count towards taxable income, too.

Employers and Employees Can Contribute

It’s important to know that both employers and employees can contribute to HSAs. Both parties can see tax benefits when doing this, as well.

Employees can benefit from contributions being deposited before taxes are collected. Paying for out-of-pocket medical costs with an HSA means that the pre-tax dollars go further. Additionally, these accounts can roll over from year to year and collect interest. It should be noted that there are contribution limits to these accounts, however.

Small businesses can benefit from all contributions to HSAs being income tax deductions. Employers also don’t have to pay payroll taxes on the contributions of their employees. When paired with an eligible high-deductible health plan, it can also mean reduced cost-sharing for small businesses.

How to Set Up an HSA For Your Employees

There are three major steps to setting up an HSA for your employees. All of the steps are straightforward, and the process is easy. Check them out below!

1. Determine Eligibility and Contributions

The first step is to find out if the health insurance plan your employees have provides an HSA, and if they’re eligible for HSAs. After you’ve found this information out, you’ll determine the contributions details. This includes how much the employees will contribute, how much the business will contribute, and the annual limit of the plan.

2. Create a Section 125 Cafeteria Plan

To ensure that your employees can contribute tax-free dollars to their HSA, you’ll need to create a section 125 cafeteria plan. This plan can be made available to the employee, their spouses, or their dependents. You can create this plan, or a payroll service can do it for you. Without the cafeteria plan, the HSA won’t be able to be set up properly.

3. Document the Plan and Manage Employer Contributions

Once the plan has been set up accordingly, the business will need to provide contributions to the employees’ accounts. The business will also need to provide the appropriate tax documents to their employees at the end of the year. Without proper documentation, neither the employee or the employer can reap the benefits on a tax return.

Frequently Asked Questions About HSAs

Are Health Savings Accounts the Same as Flexible Spending Accounts?

These two accounts are similar, however, they have some big differences. Both accounts are used to pay for health care expenses. Health savings accounts are controlled by employees. Flexible spending accounts are controlled by the employer. If an employee leaves a job, their HSA account will be theirs to keep. If they have an FSA, they may have to forfeit the money they’ve contributed.

HSAs also have more overall requirements than FSAs do. The health insurance benefits associated with the employee’s plan have minimum requirements. To qualify for an HSA, employees must have an HSA-qualified health plan. This means that there is normally a minimum deductible associated with the HSA.

How Much Do Employees and Employers Contribute to HSAs?

These figures are typically determined by the business setting up the HSA. However, with most HSAs, employee contributions are capped at $3,450 per individual. The amount is doubled to $6,900 per household, though. However, if an employee is over the age of 55 they can contribute up to $1,000 more than the normal contribution limit.

The average employer contribution to HSAs is normally around $600 per individual and $1,200 per household.

Key Takeaways

If you’re considering setting up an HSA for your employees, the process is fairly simple. It’s three easy steps. Not only will you see tax savings, but so will your employees! Consider setting up an HSA today!


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