For your people enrolled in high-deductible health plans, a Health Savings Account (HSA) offers a smart, tax-friendly way they can save for medical expenses.
HSAs don’t just help employees manage healthcare costs, they also boost overall financial wellbeing and job satisfaction. For HR professionals, knowing how HSAs work is key to building benefits packages that truly support the workforce.
We’ll break down everything you need to know about HSAs, including their benefits, tax perks, contribution limits and withdrawal rules, so you can make informed decisions that strengthen your team’s benefits offering.
What is a Health Savings Account (HSA)?
An HSA is a savings account with unique tax benefits.
The main purpose of an HSA is to save money for relevant medical expenses such as doctor visits, medications and surgeries. By allowing pre-tax contributions, HSAs can reduce the taxable income of account holders.
Here are some key features of HSAs:
- Eligibility: Must be paired with an HDHP
- Ownership: Accounts belong to the employee, not the employer
- Rollover: Unused funds carry over each year, unlike most FSAs
With an HSA, employees gain greater control over their healthcare expenditures. This advantage makes HSAs a valuable component of a comprehensive employee benefits package.
How does an HSA work?
To get started with an HSA, an employee must have a qualifying HDHP. Once eligible, both the employee and employer can contribute pre-tax dollars to the HSA.
Participants can set aside pre-tax dollars, let them grow tax-free and use the funds whenever they need to cover qualified medical costs. Since they control how and when to use the money, it gives your people more freedom to manage healthcare spending on their own terms.
Important aspects of how an HSA works include:
- Pre-tax contributions: Reduce taxable income
- Qualified expenses: Medical, dental, vision and other related costs
- Investment Growth: HSA funds can be invested for long-term growth
By understanding these dynamics, employees and employers can use HSAs as an important part of their overall financial wellness strategy.
HSA advantages for employers
HSAs don’t just benefit employees; they benefit employers too. Organizations that offer HSAs are often able to lower healthcare premiums due to the coupling with high-deductible health plans (HDHPs). This can be a strategic move for any business seeking to enhance employee satisfaction and control costs.
HSA tax advantages explained
HSAs stand out for their powerful tax advantages. Contributions go in tax-free, helping reduce taxable income right away. Plus, any growth in the account, whether through interest or investments, isn't taxed. Over time, this can lead to a substantial account balance.
Withdrawals for qualified medical expenses also remain tax-free, maximizing the value of every dollar spent. This combination of benefits fosters a more financially stable planning tool for healthcare costs.
Some tax advantages of HSAs include:
- Tax-deductible contributions: Immediate income reduction
- Tax-free growth: Investments increase without tax
- Tax-free withdrawals: No taxes on qualified medical expenses
Alight Smart-Choice Accounts®
Plan for life’s ups and downs
Now your people can save and feel secure with strategic cost-saving reimbursement accounts.
HSA contribution limits and withdrawal rules: suggested information to pass on to your employees
Educating your employees on HSA contribution limits and withdrawal rules helps them avoid costly mistakes and make informed financial decisions. This knowledge enhances HSA benefits, supporting better financial and healthcare planning.
This year, individuals can contribute up to $4,300, while families can set aside as much as $8,550 in pre-tax dollars.
If you're 55 or older, you're eligible for an additional $1,000 catch-up contribution, giving you even more room to grow your healthcare fund as retirement approaches. These limits help employees reduce taxable income and build long-term savings for medical expenses.
Contribution limit details include:
- Individual limit: $3,850 annually
- Family limit: $7,750 annually
- Catch-up contribution: $1,000 for ages 55+
If you use HSA funds for non-medical expenses before turning 59 1/2, you’ll face a 20% penalty plus regular income tax. After 59 1/2, you can withdraw money for any reason without the penalty, though non-medical withdrawals will still be taxed as income.
Withdrawal rules include:
- Qualified expenses: Tax-free withdrawals
- Non-Qualified expenses (before 59 1/2): 20% penalty + income tax
- Non-Qualified expenses (after 59 1/2): No penalty, income tax applies
Integrating HSAs into your employee benefits strategy
Integrating Health Savings Accounts into your employee benefits package is one technique to help boost your employee satisfaction.
To successfully include HSAs in your strategy, consider offering employer contributions. This enhances the appeal of your benefits package and demonstrates commitment to employee financial wellbeing. You can use the savings from lower-premium plans (HDHPs) to support these contributions.
Next, your team needs to design a successful integration plan. Elements of that plan might include:
- Education sessions: Inform employees about HSA benefits
- Employer contributions: Encourage participation and aid savings
- Regular communication: Update on any changes in limits or rules
After designing the plan, then employees need to use it. Open enrollment is the perfect time to continue educating employees about HSAs and other benefits because it’s when they’re most engaged in decisions about their health and finances. For organizations, this period represents a critical opportunity to integrate HSAs into the broader benefits conversation, ensuring employees understand how these accounts can complement their overall health and financial wellness.
These steps are a key part of a robust employee benefits program that supports workforce resilience and productivity.
How HR teams can make the most of HSAs:
- Help employees understand the value: Clear, simple education around how HSAs work can boost participation and help employees make smarter healthcare decisions.
- Maximize tax savings: Since HSAs offer tax advantages for both the company and its people, don’t leave that value on the table
- Encourage smarter healthcare spending: When employees use HSAs, they tend to be more thoughtful about their healthcare choices, which can lead to lower overall costs.
By weaving HSAs into your broader benefits strategy, you’re not just giving your people a savings account, you’re empowering your team to take control of their health and finances. That kind of support can go a long way in driving satisfaction, retention and long-term success.
At Alight, we bring deep experience in benefits administration and employee engagement to help companies make the most of their HSA offerings. From seamless implementation to ongoing education and support, we work closely with HR teams to ensure employees understand and use their accounts confidently. Whether you're looking to boost participation, streamline administration, or align HSAs with broader wellness goals, Alight is here to help you build a benefits strategy that works for your people and your business.
Health Benefits
Get more from your health benefits
Engage employees with their health benefits in an impactful way. ROI guaranteed.
