How Employer Contributions Work for HSAs (2024)

Health savings accounts (HSAs) are a tax-advantaged way to save for medical expenses. Employer contributions to a health savings account are often part of this benefits package, which helps employees cover healthcare costs. If a health savings account has employer contributions, those funds are not counted as taxable income, providing a significant boost to employee savings.

If you’re considering an HSA, a financial advisor can help you select investment options within the account and strategize withdrawals to minimize taxes and penalties.

What Is an HSA?

An HSA is a type of savings account that allows individuals with high-deductible health plans (HDHPs) to set aside money for qualified medical expenses.

Unlike a flexible spending account (FSA), funds in an HSA roll over year after year, providing a long-term savings vehicle for healthcare costs.

HSAs are funded with pre-tax dollars, meaning contributions reduce your current taxable income. Both individuals and employers can contribute to an HSA, up to the HSA maximum contribution limit set annually by the IRS. The funds can be used for a wide range of healthcare expenses, including doctor visits, prescription medications and even some over-the-counter items.

One of the primary benefits of an HSA is its triple tax advantage:

You should also note that after age 65, you can withdraw funds from your HSA for non-medical expenses without incurring the 20% penalty. However, you will still need to pay income tax on those withdrawals. For medical expenses, however, the withdrawals remain tax-free and penalty-free.

And finally, any unused funds can be invested, potentially growing your savings even further over time.

How Employers Can Contribute to HSAs

Health savings account employer contributions can happen in several ways. One common method is a direct contribution, where the employer deposits a set amount into the employee’s HSA, either as a lump sum or in installments.

Another method involves matching the employee’s own HSA contributions, similar to how employers might match contributions to a 401(k) plan.

Employers can also offer HSA contributions as part of a wellness program, rewarding employees for completing health-related activities, such as annual check-ups or participating in fitness programs.

How Often Can Employers Contribute to an HSA?

Employers can make contributions to an HSA as often as they like, whether on a regular basis, such as with each paycheck, or through one-time contributions. The timing and frequency of contributions are typically outlined in the employer’s benefits plan.

However, both employer and employee contributions are subject to annual limits set by the IRS. These limits are periodically adjusted for inflation and depend on whether the account holder has individual or family coverage under a high-deductible health plan. Regular contributions can help employees steadily build their HSA balances, providing a ready source of funds for healthcare expenses throughout the year.

HSA Contribution Limits

The IRS sets contribution limits for HSAs, adjusted each year for inflation. For 2024, the contribution limit is $4,150 for individuals with self-only coverage under an HDHP and $8,300 for those with family coverage. Additionally, individuals aged 55 or older can contribute an extra $1,000 as a catch-up contribution, bringing their total potential contribution to $5,150 or $9,300, respectively.

Is There a Limit on Employer Contributions?

There is no specific limit on how much an employer can contribute to an employee’s HSA. However, HSA employer contributions count toward the overall annual limit.

For example, if an employer contributes $2,000 to an employee’s HSA and the employee has self-only coverage, the employee can contribute up to $2,150 to reach the 2024 limit of $4,150. It’s essential for both employers and employees to monitor contributions throughout the year to ensure they do not exceed the IRS limits, as excess contributions could be subject to penalties and taxes.

Bottom Line

HSAs offer tax advantages and flexibility for managing healthcare expenses. Employer contributions add pre-tax funds that do not count as taxable income. Knowing the annual limits and tax benefits can help you use your HSA effectively.

Tips to Manage HSA Investments

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