Guide to health savings accounts (HSAs)

Learn the basics of offering an HSA at your organization.

Looking to augment or revamp your organization's health benefits? Talk to someone about which options are the best fit for your team. 


Flexible health benefits are a top priority for employees

One of the biggest challenges small employers face when it comes to employee benefits  is being able to offer a competitive health benefit that can compete with larger employers’ bigger budgets.

Offering a flexible benefits package is the best way to ensure that your employees are receiving the benefits that are the most important to them. If you’re an employer that wants to add more choise and flexibility to your traditional group plan, an account-based health plan (ABHP) may be just what you need.

ABHPs are an excellent way to supplement traditional health insurance plans and offer a flexible, quality health benefit to recruit and retain top talent. 

One of the most common ABHPs is a health savings account (HSA). This popular benefit allows employers to cover some or all of their eligible employees’ healthcare expenses on a pre-tax basis.

In the following sections, we’ll show you what makes HSAs unique and how they can be the flexible health benefits solution your employees want, as well as compare them to popular alternatives to help you find the best solution for your business.

What is a health savings account?

Health savings accounts are special savings accounts where money can be contributed on a pre-tax basis to be used to pay for medical services and other qualifiying out-of-pocket expenses. HSAs can be opened by an individual or offered by an employer alongside an HSA-qualified high-deductible health plan (HDHP). Regardless of how the HSA is set up, the individual employee always owns it. 

Both the employer and the employee can contribute to the HSA so long as the combined employee and employer contributions don’t exceed  the annual contribution limit. These annual limits are updated annually by the IRS in Publication 969

Both employee and employer contributions remain in the HSA indefinitely until they’re used. There’s no vesting schedule or penalty if the money isn’t used, and the money rolls over yearly.

Employees aged 65 and older are free to use their HSA for anything without penalty—not just out-of-pocket medical expenses—so the money you and your employees contribute can be part of their long-term retirement plan. Also, most HSAs issue a debit card or credit card, so participants can easily pay for qualified health expenses with the card.

With HSAs, taxpayers receive a 100% federal income tax deduction on annual contributions. They also may withdraw HSA funds tax-free to pay for qualified out-of-pocket medical expenses, and they may defer making such withdrawals indefinitely without penalties.

The following chart highlights the tax advantages of an HSA:


Triple tax advantages

HSAs have tax-deductible contributions, tax-free interest/investment gains, and tax-free withdrawals (for qualified health expenses).


Employees can invest their health savings for the long term. Investment earning and growth is 100% tax-free.

No “use it or lose it”

Unspent HSA funds are rolled over each year, building a nest egg for future retirement, like a 401(k) or IRA.

HSAs are a health benefit designed to support employees' healthcare needs on a long-term basis. The account and its funds belong to the employee, who will retain ownership even if they change health insurance plans or jobs.

Who is eligible for a health savings account?

The IRS has strict guidelines for who is eligible to open and contribute to an HSA. If you’re considering an HSA at your organization, make sure your benefits coordinator knows the guidelines for eligibility.

An eligible individual qualifies for an HSA if they meet the following requirements:

  • They’re 18 years or older.
  • They’re enrolled in an HSA-qualified health plan, specifically a high-deductible health plan. 
  • They’re not enrolled in any other non-HSA qualified health plan.
    • This would include any current plan that doesn’t meet the requirements for an high-deductible health plan.
  • They’re not eligible to use a general-purpose flexible spending account (FSA).
  • They can’t be claimed as a dependent on someone else’s tax return.
  • They’re not enrolled in Medicare Parts A & B or Medicaid.

If an employee does not live in the United States, they can still open an HSA under certain circumstances:

  • They’re a U.S. citizen and are paid in U.S. dollars
  • They’re employed in the U.S. and are paid in U.S. dollars.

Pros of health savings accounts

Now that you know a little more about HSAs and how they work, let’s go over and outline their advantages. 

  1. Tax savings: Contributions an employee makes to their HSA are tax-deductible. Likewise, any contributions made by you as an employer aren’t considered taxable income because they’re made on a pre-tax basis.
  2. Rollover contribution: All excess contributions remain in the HSA indefinitely until the funds are used. There is no vesting schedule or penalty if the money isn’t used, and excess contributions are automatically rolled over into the next year.
  3. No tax on qualified withdrawals: Withdrawals used to pay for qualified medical expenses for your employee, their spouse, and their dependents are never taxed. The interest they earn on the account accumulates over the years, tax-deferred. If used to pay for qualified medical expenses, the withdrawal is tax-free.
  4. Portability: The account is portable and the employee can keep it forever. The account and the funds within it stay with them even if they quit your company or retire.
  5. Many expenses qualify: Your employees have access to a wide variety of over 200 qualified health expenses that are outlined in IRS Publication 502.

Cons of health savings accounts

HSAs have inherent advantages that other savings accounts don’t offer. But there may be a few downsides to HSAs that could give people pause. Let’s take a look at some of those below.

  1. Contribution limits: With HSAs, there’s a set annual maximum amount which limits how much you and your employees can contribute each year. 
  2. High-deductible requirements: High-deductible health plans can be a greater financial risk than other types of health insurance plans. Even though employees will pay a lower health insurance premium each month, it could be difficult for them to come up with funds to meet the annual deductible.
  3. Pre-funded accounts: Employers have to pre-fund HSAs, which means you must put up the cash for your employees to use up front, regardless of whether they will spend the money or not.
  4. Complicated rules: With HSAs, the eligible individual is the plan administrator, not the financial institution. Many individuals find the rules and record keeping of HSAs to be complicated and cumbersome.
  5. Potential penalties: If an employee withdraws funds for non-qualified expenses before they turn 65, they'll owe income taxes on the money plus a 20% penalty.

How employees can maximize their health savings account

HSAs are invaluable health benefits because they offer immediately accessible money to help your employees pay for medical costs without them having to tap into their regular checking or savings account. 

However, once your employee retires and enrolls in Medicare, their financial institution will no longer allow them to contribute to their HSA. This means they should do everything they can throughout their working years to maximize their HSA’s value.

Let’s look at four ways an employee can boost their HSA balance early on so they can continue to enjoy it once they can no longer contribute to it.

Contribute the maximum amount allowed

Your employees should compare their current annual contributions to the maximum contribution limit to see how much more they can add to their HSA each year. If they’re using the account as a retirement savings vehicle and/or anticipate having many out-of-pocket expenses in the future, they should aim to contribute the maximum amount allowed every year. 

If they’re 55 or older, they can also take advantage of catch-up contributions and add $1,000 per year.

Know what expenses are eligible

Employees have the ability to spend their HSA money tax-free on healthcare items and out-of-pocket expenses, such as co-payments for medical care, prescription drugs, or bills not covered by insurance such as vision care and dental care. 

They can even use their HSA for basic over-the-counter items, such as bandages, sunscreen, and cold and allergy medicine. The more you educate your employees on HSA-items, the more they’ll utilize their funds.

Consolidate multiple health savings accounts

Some people may have more than one HSA in their lifetime. For example, you might have an employee that already has an HSA from a previous employer and then opened up a new one at your company.

Individuals with multiple HSAs can consolidate them into a single account so they can accelerate overall growth. Also, to make HSAs eligible for investment, they must have a minimum balance, so combining accounts can help participants reach those requirements faster.

Invest a portion of the savings

As stated above, if employees have a minimum balance in their HSA (usually $2,100), they may be eligible to invest a portion of the savings. This can be an excellent way to grow savings tax-free while also being able to pay for certain healthcare expenses both now and in the future.

However, keep in mind that not all HSAs will be eligible for this benefit. Advise your employees to check with their provider to see if they qualify.

The alternative to a health savings account

If you’re not sure if an HSA is right for your organization, you have the option of implementing a health reimbursement arrangement (HRA). Sharing similar features as an HSA, an HRA is an arrangement between an employer and an employee, allowing employees to get reimbursed, tax-free, for their eligible medical expenses.

The HRA that is most similar to an HSA is an integrated HRA. The integrated HRA, or group coverage HRA (GCHRA), is for businesses of all sizes that offer a group health insurance plan. 

Only employees who opt into the group health plan can take advantage of the HRA. Employers can offer unlimited monthly allowances for eligible employees based on seven employee classes to pay for eligible expenses not fully paid for in their group health insurance plan, such as deductibles, coinsurance, and other items. 

Integrated HRAs and HSAs are both good ways for employers to supplement a group health insurance plan. But determining which option is right for your organization depends on the type of group health plan you’re offering and the level of flexibility and control you want over the benefit.


Get our free eguide: The complete guide to the group coverage HRA (GCHRA) 

Comparing an HSA to an integrated HRA

While both benefits can boost your group health insurance, the lack of contribution requirements, pre-funding,  and annual limit make integrated HRAs much more flexible than an HSA. The comparison chart below covers key differences to consider when deciding between an integrated HRA and an HSA.

  Integrated HRA Health Savings Account (HSA)
What type of plan is it?  Section 105 reimbursement plan Section 125 cafeteria plan
How does it work?  Employers offering a group health insurance plan set an allowance to help employees pay for out-of-pocket expenses.
The employer pays when employees submit expenses for reimbursement. Funds are capped at the annual allowance amount and all reimbursements are tax-free.
Employees, or employers on their behalf, covered by an HSA-qualified high-deductible health plan, open an employee-owned account for medical expenses.
Employees and employers contribute pre-tax dollars to the account up to the IRS-defined annual contribution limit.
Who may participate? Any employees covered by an ACA-approved group health insurance plan Employees with high-deductible health plan coverage with no other major medical coverage
Who may contribute? Only the employer
Both the employer and employee

Are there annual contribution limits?  No. Employers may offer as much or as little as they wish. Yes. In 2022, contribution limits are $3,650 for individuals and $7,300 for families.
Catch-up contributions are $1,000 for both eligible individuals and families.
What are the customization options? Employee classes: Employers can group employees into classes on job-based criteria to determine benefit eligibility and customize allowance amounts.
Eligible expenses: Employers can allow all expenses listed in IRC 213(d) or only expenses that require an explanation of benefits (EOB).
Deductible: Employers can require employees to pay a set dollar amount before being eligible for reimbursement.
Cost-sharing: Employers can require employees to pay a percentage of eligible expenses submitted for reimbursement.
Does it require a separate bank account? No Yes
Which expenses are eligible? All expenses listed in IRS Publication 502— however, limits can be outlined in the EOB All expenses listed in IRS Publication 502
How are they taxed?
Reimbursements are tax-free for the employer and employee. Deposits are made pre-tax and withdrawals are tax-free, so long as they’re being withdrawn for qualifying medical expenses.
Can funds be used for non-medical expenses?
No Yes, but employees younger than 65 will pay income taxes plus an additional 20% tax penalty.
Employees 65+ aren’t subject to a penalty but still pay income taxes.
Are unused funds able to be rolled over from year to year?
No Yes
How does employee utilization affect employer costs?
Cost is based on employee utilization up to the total annual allowance amount. Any unused allowance at the end of the year stays with the employer. 100% of employer contributions stay in the employee’s account regardless of utilization.
Is the fund or account portable? What happens to the remaining funds when an employee leaves the company? No. Any unused allowance stays with the employer when the employee leaves.
However, employees may have up to 90 days after departure to submit incurred expenses for reimbursement while they were still employed.
Yes. All account funds stay with the employee, including employer contributions, stay with the employee when they leave.

Download our free HRA vs HSA comparison chart for easy reference

Offering a health savings accounts alongside a health reimbursement arrangement

If you’re interested in both HSAs and HRAs and can’t decide which is best for your organization, you’re in luck! As an employer, you can offer both benefits at the same time. In fact, this approach often provides the best value to employees. However, some requirements must be met for employees to use an HRA and an HSA and remain compliant with regulations. 

The simplest way for an employer to do this is to offer a "limited-purpose HRA” that only reimburses employees for expenses that are exempt from the HSA deductible requirement.

These expenses include:

  • Your health insurance premium
  • Your long-term care insurance premium
  • Dental expenses
  • Vision care expenses

A standard HRA will make an employee ineligible for an HSA because it would provide coverage for all medical expenses, including copays for prescriptions, which aren’t exempt.

If you plan to offer an HRA through a provider, you must make sure they allow you to limit expenses to just these categories so that you can be in compliance.


Frequently asked questions about health savings accounts

What is the difference between an HRA, HSA, and FSA?

An HRA is an arrangement between an employer and an employee, allowing them to get reimbursed for their medical expenses. An HSA is a portable account the employee owns and keeps with them even after they leave the organization. With an HRA, the employee only gets paid when they incur an eligible expense, while an HSA is pre-funded each month regardless of whether or not they spend the money.

HRAs, HSAs, and FSAs are all reimbursement model health insurance plans. However, each type has different benefits and requirements for employers and employees. 

Learn more about their differences with our comparison chart

How do I qualify for an HSA?

To open an HSA for your organization, you need to also offer a high-deductible health plan. The IRS defines what is considered an HDHP. In 2022, your plan’s annual deductible must be at least $1,400 for individual coverage or $2,800 for family coverage.

For employees  to be eligible for an HSA:

  • They must be covered under an HDHP.
  • They must  have no other health coverage except what is outlined in IRS Publication 969.
  • They must not be enrolled in Medicare.

How much is the HSA contribution limit?

Employees can make pre-tax contributions (or tax-deductible contributions, if not through just your employer contributions) in 2022 of up to $3,650/year if they have individual coverage or up to $7,300/year for family coverage.

People age 55 and older can contribute an extra $1,000 per year. Your employees can add money to the account for the previous year’s contribution limit until the tax-filing deadline.

How can employees use their HSA money?

You employees can spend their HSA money tax-free on out-of-pocket expenses, such as their deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance such as qualified vision care and dental care. They can use our eligible expense tool to learn more or ask their personal tax advisor.

Unlike with an FSA, employees don’t have to use HSA funds by the end of the year. Instead, HSA funds can grow tax-deferred in their HSA account for later use.

If they use HSA funds for non-medical expenses, they must pay taxes on the withdrawal, plus a 20% penalty before age 65.

How can employees invest their HSA money?

Many HSA administrators or banks will let your employees shift money into mutual funds and other investments after their HSA account balance reaches a certain level.

Can employees contribute to their HSA account after age 65?

Employees can keep and use their HSA account at any age, but they can no longer make new contributions to the account after they have signed up for Medicare Part A or Medicare Part B, which usually happens at age 65.

Do the HSA tax benefits phase out at certain income levels?

No. With an HSA, there are no income limits.

If an employee has an employer-provided HSA, what happens if they switch jobs?

Employees can keep the money in their HSA account after they leave a job, similar to a 401(k). There’s no requirement to spend it before they terminate employment.

Humaaan | Man Standing 5

Interested in learning how PeopleKeep can help your organization with benefits?

Speak with a PeopleKeep personalized benefits advisor who can answer your questions and guide you toward a better benefits package for your team.