HSAs for Your Employees: A Comprehensive Guide for HR Leaders

Healthcare costs can take a serious bite out of your employees’ budgets. With the average American spending $6,159 annually on healthcare, it ranks as the fifth largest expense, right behind food and insurance. But what if your benefits package could help ease that financial strain?

Enter the Health Savings Account (HSA) — a powerful tool for covering healthcare expenses. HSAs not only provide employees with tax advantages and investment options but also offer businesses a way to support their teams' financial wellbeing. They’re a smart, forward-thinking addition to any benefits package, and they make a real difference in employees' lives.

Thinking about adding HSAs to your offerings? Let's down exactly how HSAs work, why they’re so effective, and how they can transform your benefits strategy. Empower your employees with tools to take control of their healthcare costs while strengthening your organization’s commitment to their success.

What Is an HSA? Who Qualifies and Contributes?

An HSA is a type of savings account designed specifically for medical expenses. Account holders can use it to pay for pretty much anything related to their healthcare needs, from prescriptions to physician visits and dental care. Money deposited into an HSA may earn interest or investment gains free of tax. So long as the account holder uses the HSA exclusively for health-related costs, there's also no tax on withdrawals.

HSAs are only available to people who enroll in HSA-eligible medical plans. Usually the plans come with a higher deductible than traditional medical insurance. But they may offer more affordable monthly premiums to compensate. Employers can offer HSAs to employees who enroll in company-sponsored HSA-eligible health insurance. 

Employees, employers, and family members enrolled in a high-deductible health plan that comes with an HSA can all make contributions to the account. The IRS sets annual HSA contribution limits and typically raises them to account for inflation. 

How Does an HSA Work?

An HSA is not health insurance itself — it is a feature of a health insurance plan that is essentially a bank or investment account. It usually comes with a debit card that the account holder can use to pay for medical expenses.

Anyone who enrolls in an HSA-eligible insurance plan can set up an HSA when they enroll for coverage. Participants use their insurance to visit the doctor or pick up a prescription. But they can use their HSA plan to pay for any uncovered medical expenses.

Here are several key elements of an HSA you should understand.

Features of HSAs

1. Tax Benefits: HSAs offer triple tax advantages. Contributions are tax-free, lowering taxable income. Funds in the account can grow through investments tax-free. And withdrawals for qualified medical expenses are also tax-free.
2. Investment Opportunities: Many HSAs allow account holders to invest funds in stocks, bonds, or mutual funds, offering the potential for significant growth over time. These investment gains remain tax-free if used for eligible healthcare expenses.
3. Long-Term Savings: Unlike flexible spending accounts (FSAs), HSA funds roll over year after year, building a safety net for future medical costs or retirement healthcare needs.

Qualified Medical Expenses Under an HSA

HSA participants can use their available funds to pay for medical treatment and related costs. Some ways employees may spend their HSA monies include:

• Physician visits and hospital treatment: An HSA covers any medical treatments and care, including co-pays, diagnostics and lab tests, and surgeries. 
• Prescribed medications: Any pharmaceuticals prescribed by a doctor are HSA-eligible.
• Medical equipment: Accountholders may use HSA funds to pay for most health-related devices, including crutches, wheelchairs, and hearing aids. 
• Therapy: Doctor-ordered therapy, including physical, mental, and occupational therapy, qualify as HSA-eligible expenses
• Dental care: Participants may use HSA funds to pay for routine dental care, tooth repair, and orthodontics.
• Vision: Eyeglasses, contacts, and other vision-related expenses are HSA-eligible.
• Ambulance: HSA account holders can use their funds to pay for ambulatory services.
• Over-the-counter (OTC) medications: Participants can use HSA funds on OTC medications, including pain relievers, cold and flu care, and allergy treatments. 
• Personal care items: Sunscreen, first aid supplies, and menstrual items all qualify as HSA-eligible.

HSA Rollovers

Once an employee enrolls in an HSA, it belongs to them. They keep any saved funds and contributions regardless of whether they continue to work for your company. Employees can rollover their existing HSA funds into a new employer's HSA plan should they decide to switch jobs. They may also rollover their HSA into an account they open through a financial institution.

The rollover option means employees never lose access to their funds. The money isn't conditional on their employment with your company. Rollovers are usually tax-free unless the employee opts to withdraw the funds for non-medical expenses.

Benefits of HSAs for Employers

What can your company stand to gain from offering HSAs? Plenty! Just take a look at these advantages.

Lower Healthcare Costs for Both Employers and Employees

HSAs are only available to people who enroll in a high-deductible healthcare plan (HDHP). Because HDHPs set higher deductibles than traditional insurance, they usually come with lower monthly premiums. If your company helps fund your team's medical insurance, you may realize cost savings from the reduced premiums. (Employees also see decreased expenses on their share of the premiums.)

Increased Employee Satisfaction and Engagement

You may see a few new smiles around the office when you offer an HSA. With it, employees get more control over their healthcare expenses. They're not limited to a traditional plan with high monthly premiums. An HSA shows your company's commitment to a well-rounded selection of healthcare benefits tailored for everyone, not just a few.

Enhanced Ability To Attract and Retain Top Talent

Over 60% of employees place a premium on their company's benefit offerings. And health-related benefits top the list, with nearly 90% of employers citing them as the most important component of their package. By offering HSAs, your organization remains competitive in the talent landscape. Employees can use your HSA program for tax-advantaged savings on medical costs.

Tax Advantages for Employers

HSAs offer several tax benefits for account holders, but employers gain, too. Any contributions from an employee's paycheck reduce the amount of earnings subject to federal unemployment (FUTA) and Federal Insurance Contributions Act (FICA) taxes. That can make a significant difference to your company's annual employee-related tax payments. 

If your company opts to contribute to an employee's HSA, they may be tax deductible. The deductions may reduce overall employer income tax liability. 

Fewer Reporting and Oversight Requirements

Employees retain responsibility for any HSA withdrawals and expenses, not employers. Your company won't need to hire an administrator to oversee HSA claims or check whether workers use their funds for medically-related costs. That's different from Health Reimbursement Arrangements (HRAs) or Flexible Spending Accounts (FSAs) that require some employer involvement.

HSAs usually don't fall under the Employee Retirement Income Security Act (ERISA). That means you won't need to worry about filing a special tax form for the HSA at year-end. You will need to report contributions on the employee's W-2 and directly to the IRS, but that's less cumbersome than ERISA-related tax filings.

Benefits of HSAs for Employees

Team members looking for a way to minimize healthcare expenses and save money on taxes may appreciate an HSA. 

Triple Tax Advantage

An HSA is all about tax savings. Accountholders can make contributions using pre-tax earnings, reducing the amount of their taxable income. If your employees decide to invest contributions in their plan's available financial assets, their balance may grow tax-free. And when it comes time to withdraw money to pay for qualifying medical expenses, they won't incur any taxes, either. 

Ownership and Portability of HSA Funds

Any contributions made to an HSA don't go through a vesting period. They're immediately available for the employee's use. If your team member decides to leave the company, they keep the balance of their HSA. The account stays with them wherever they go. Previous employees may rollover their remaining HSA funds into a new account if they want to. 

Potential for Long-Term Savings and Retirement Planning

Your team may not use all their HSA contributions during the year. And that's okay, because there's no rule requiring them to do so. In fact, saving more money in an HSA can be beneficial over the long term since any invested contributions may continue to build value. Some HSA accountholders treat their HSA similarly to a retirement plan, and make extra contributions for medical care they may require later in life.

Increased Control Over Healthcare Spending

Healthcare needs vary tremendously from one person to another. Some of your employees may rarely visit the doctor. So enrolling in a less-expensive HDHP and HSA may be a financially better alternative than traditional insurance. 

But HSAs also benefit those who routinely seek medical care. Tax advantages and account growth may make the plan financially viable for those individuals. In either case, you're putting the choice in the hands of your employees so they can decide what's best for them. 

A Step-by-Step Guide to Implementing HSAs in Your Workplace

There are clear benefits to HSAs for your organization and your team. But how do you set one up? It's a fairly simple process to navigate.

Step 1: Choose the Right HSA Provider

When it comes to HSA providers, not all offer the same benefits. Consider shopping around with different companies to see what they provide. Some of the things you'll want to compare are fees, banking options (such as debit card and online account access), and contribution processes. 

Your health insurer may partner with different HSA providers. Ask them if they can recommend an HSA provider that aligns with your HDHP coverage options.

Step 2: Communicate HSA Benefits to Employees

Your team may be unfamiliar with HSAs if they've never used one before. Even if they know how an HSA works, explaining your organization's plan may encourage employees to take advantage of it. 

Consider holding an all-hands meeting to introduce the HSA and its features. You can use the time to answer any inquiries your employees have, too. 

Once the HSA becomes a part of your benefits package, think about creating a simple, easy-to-read document for employees to refer to. 

Step 3: Provide Educational Resources and Decision Support Tools

Employees may be on the fence about enrolling in an HSA and HDHP. Try to provide them with resources to guide their decision. A staff meeting is a good start. But documents explaining how an HSA works in plain language go even further.

You might consider creating a flowchart that outlines your insurance coverage options, costs, and benefits to aid in their decision-making process. 

Best Practices for HSA Administration

Getting the right processes in place now — before you introduce an HSA at your company — can eliminate hiccups after you roll out the new plan. 

Try to make HSA enrollment simple for your team. You might lean on your organization's benefit enrollment portal or Enterprise Resource Planning (ERP) system to capture new participant information and transfer it to the HSA provider. 

While HSAs don't require quite as much reporting as some other plans, you'll want to keep track of employee/employer contributions for tax purposes. Contributions appear on an employee's W-2 and a separate reporting tax form at year-end.

Employees will likely have questions as they start using their plan. Consider making a list of the inquiries you receive. You can turn the list into an FAQ document within your benefit documents or employee handbook. That way, employees can easily access commonly asked questions when they need to. 

Common HSA Mistakes to Avoid

As an HR leader, setting up and managing Health Savings Accounts (HSAs) for your organization can be incredibly rewarding, but it’s not without its challenges. Missteps in the setup or administration process can lead to compliance issues, confusion, or even employee dissatisfaction. Here are common mistakes to watch out for — and how to avoid them:

1. Overlooking Eligibility Requirements

Not all health plans qualify for HSA participation. To be eligible, the plan must meet IRS standards for a High Deductible Health Plan (HDHP). Missing this detail can leave employees without the ability to contribute to their accounts. 

Avoid It: Work with your benefits provider to verify that your company’s plan meets IRS criteria before offering an HSA option.

2. Skipping Clear Communication During Rollout

Employees may not fully understand how HSAs work, leading to low enrollment or misuse of funds. Confusion about contribution limits, qualified expenses, or tax benefits is common.

Avoid It: Host informational sessions, create easy-to-understand guides, and include FAQs in your benefits materials to help employees grasp the basics of HSAs.

3. Failing to Track Contributions

Over-contributions, whether by employees or the company, can result in tax penalties. Employers also need to ensure that contributions are properly reported on employee W-2 forms. 

Avoid It: Regularly monitor contributions and collaborate with your payroll provider to ensure accurate reporting and compliance with annual IRS limits.

4. Ignoring Compliance and Reporting Deadlines

HSAs come with specific tax reporting requirements for both employees and employers. Missing deadlines for Form 5498-SA (HSA contributions) or Form 8889 (distributions) can create issues for your team.

Avoid It: Partner with your HSA provider to stay on top of reporting deadlines and ensure all necessary documentation is filed correctly and on time.

5. Neglecting Post-rollout Support

Employees will have questions after the HSA program launches, and without ongoing support, they may underutilize the benefit or make costly mistakes.

Avoid It: Establish a point of contact for HSA-related questions, whether it’s your internal HR team or your benefits provider, and offer resources like an online FAQ or regular updates.

By avoiding these common pitfalls, you’ll set your HSA program up for long-term success — ensuring your employees can fully benefit from this valuable tool while keeping your organization compliant and well-prepared.

Add a Wellness Program to Your Benefits Mix

HSAs can certainly elevate your benefits offerings and give your employees better options when it comes to health care. Their tax advantages and investment options offer a combination of cost savings and potential long-term account growth. Employers who provide them stand to realize a few benefits, too — improved staff retention and lower healthcare premiums.

If you're on the hunt for ways to reduce healthcare costs for your company, consider adding a wellbeing program like Wellhub. We offer participants access to local gyms, online fitness classes, and tools to enhance emotional wellness. Our recent Return on Wellbeing study shows over 90% of companies that invest in employee wellness see a reduction in their healthcare expenses.

Speak with a Wellbeing Specialist to learn how Wellhub can benefit your organization. 

You May Also Like:

• A Generational Guide to What Workers Want — And How to Deliver
• 7 Employee Benefits You’re Required to Give
• What Benefits Do Employees Value Most?

References:

• Fidelity Investments. What is an HSA, and how does it work? (2024, August 14). https://www.fidelity.com/learning-center/smart-money/what-is-an-hsa
• HealthCare.gov. Understanding HSA-eligible Plans. (n.d.) https://www.healthcare.gov/high-deductible-health-plan/hdhp-hsa-work-together/
• RSM US. Health savings account benefits for employees and employers. (n.d.). https://rsmus.com/insights/services/business-tax/health-savings-account-benefits-for-employees-and-employers.html
• SHRM. (n.d.). 2024 Employee Benefits survey. https://www.shrm.org/topics-tools/research/employee-benefits-survey
• U.S. Bureau of Labor Statistics. (2024, September 25) Consumer Expenditures - 2023. https://www.bls.gov/news.release/cesan.nr0.htm 
• WTW. Health and Benefits. (n.d.). https://www.wtwco.com/en-gb/solutions/health-and-benefits