As a small business owner, managing health care costs for yourself and your employees can be challenging. One effective tool to consider adding is a Health Savings Account (HSA). HSAs offer a range of benefits that can help you save on health care expenses while providing valuable tax advantages. You may already have an HSA. Now is a good time to review how these accounts work because the IRS has announced the relevant inflation-adjusted amounts for 2025. Keep reading to learn more about those amounts and how tax-smart HSAs can benefit your small business and employees.

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Employees can’t be enrolled in Medicare or claimed on someone else’s tax return.

Here are the key tax benefits:

• Contributions that participants make to an HSA are deductible, within limits.
• Contributions that employers make aren’t taxed to participants.
• Earnings on the funds within an HSA aren’t taxed, so the money can accumulate tax-free year after year.
• HSA distributions to cover qualified medical expenses aren’t taxed.
• Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

To be eligible for an HSA, an individual must be covered by a “ high-deductible health plan.” For 2025, a high-deductible health plan has an annual deductible of at least $1,650 for self-only coverage or at least $3,300 for family coverage.

For self-only coverage, the 2025 limit on deductible contributions is $4,300. For family coverage, the 2025 limit on deductible contributions is $8,550. Additionally, annual out-of-pocket expenses for covered benefits can’t exceed $8,300 for self-only coverage or $16,600 for family coverage.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2025 of up to $1,000.

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can build for years.

An employer that decides to make contributions on its employees’ behalf must generally make similar contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make similar contributions, the employer is subject to a 35 percent tax on the aggregate amount contributed by the employer to HSAs for that period.

Your employees can take HSA distributions to pay for qualified medical expenses. This generally means expenses that would qualify for the medical expense itemized deduction. They include costs for doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.

The withdrawal is taxable if funds are withdrawn from the HSA for any other reason. Additionally, an extra 20 percent tax will apply to the withdrawal unless it’s made after age 65 or in the case of death or disability.

As you can see, tax-smart HSAs can benefit your small business and employees by offering a flexible option for providing health care coverage. But the rules are somewhat complex. If you have questions, the business tax professionals at Ramsay & Associates are here to help. Contact us if you’d like to discuss offering this benefit to your employees.