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. It’s a good time to review how these accounts work because the IRS has announced the relevant inflation-adjusted amounts for 2026.
The benefits of a health savings account
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.
READ MORE: The Facts About Health Savings Accounts
Key 2026 amounts
To be eligible for an HSA, an individual must be covered by a “high-deductible health plan.” An HDHP is generally a plan with an annual deductible that isn’t less than $1,700 for self-only coverage and $3,400 for family coverage in 2026 (up from $1,650 and $3,300, respectively, in 2025). In addition, in 2026, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $8,500 for self-only coverage and $17,000 for family coverage. In 2025, these amounts are $8,300 and $16,600, respectively.
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 2024 and 2025 of up to $1,000.
Contributing on an employee’s behalf
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% tax on the aggregate amount contributed by the employer to HSAs for that period.
Paying for eligible expenses
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% 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, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us with questions or if you’d like to discuss offering this benefit to your employees.
© 2020. Updated May 2025.
