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Maryland Health Connection for Small Business
Health Savings Accounts (HSA): Benefits, Eligibility, and How It Works for Employers and Employees
A Health Savings Account (HSA) is a tax-advantaged savings account that allows eligible individuals to save and pay for qualified medical expenses. HSAs are paired with a qualified High Deductible Health Plan (HDHP) or eligible with any Bronze or Catastrophic plan.
Quick Links:
What is a Health Savings Account (HSA)?
Key benefits of an HSA
Who is eligible for an HSA?
How employees can use HSA funds
Example of potential savings
Important information for employers
Important information for employees
HSA administrators by insurance carrier
Frequently asked questions about Health Savings Accounts
Important disclosures
What is a Health Savings Account (HSA)?
An HSA helps employees save pre-tax dollars for eligible healthcare expenses such as doctor visits, prescriptions, dental care, vision services, and more.
Health Savings Accounts provide valuable financial and tax advantages for both employees and employers.
For Employees
Contributions are tax-free when made through payroll deductions.
Funds grow tax-free through interest or investment earnings.
Withdrawals used for qualified medical expenses are tax-free.
Unused funds roll over year to year.
Employees own the account and keep it if they change jobs or retire.
Funds can be invested, allowing long-term growth potential.
Qualified medical expenses can be reimbursed at any time, provided proper documentation is maintained.
For Employers
HSAs can help attract and retain employees by enhancing benefits packages.
Employer contributions may help offset employee healthcare costs.
Employer contributions are generally tax-deductible.
Payroll deductions simplify employee participation and contributions.
HSAs can support employee financial wellness and healthcare affordability.
To contribute to a Health Savings Account, an individual must meet all IRS eligibility requirements:
HSA Eligibility Requirements
You must be enrolled in a qualified High-Deductible Health Plan (HDHP) or any Bronze or Catastrophic plan.
Not be enrolled in disqualifying non-HDHP coverage.
Not be claimed as a dependent on another person’s tax return.
Not be enrolled in Medicare.
Important: Individuals enrolled in Bronze or Catastrophic Marketplace plans should verify whether their plan meets IRS HSA qualification requirements before contributing.
How Employees Can Use HSA Funds
HSA funds may be used to pay for qualified medical expenses for the account holder, spouse, and eligible dependents.
Qualified Medical Expenses
Examples of qualified expenses may include:
Doctor visits
Prescription medications
Dental care
Vision exams and glasses
Mental health services
Medical equipment and supplies
HSA Reimbursement Flexibility
One of the most valuable HSA features is the ability to reimburse yourself later for qualified out-of-pocket medical expenses.
For example, if you pay for your child's braces using personal funds, you can reimburse yourself tax-free from your HSA years later, as long as:
The expense occurred after the HSA was established.
The expense was qualified under IRS guidelines.
You retain receipts and supporting documentation.
Employee Compensation and Tax Breakdown:
Base Annual Income: $65,000
Annual HSA Contribution: $3,000*
Anticipated Federal Income Tax Bracket: 22%
FICA Tax Rate: 7.65%
Projected Yearly Tax Savings:
Federal Tax Reduction: $660
FICA Tax Reduction: $230
Combined Estimated Savings: $890
*The employee sets aside $3,000 for eligible medical costs while lowering their total taxable income by $890.
Investing HSA Funds
Many HSA providers offer investment options that allow account holders to grow their balances over time. Investment availability and minimum balance requirements vary by HSA administrator.
Investment earnings remain tax-free when used for qualified medical expenses.
Important Information for Employers
HSAs can help support employee recruitment and retention.
Employers' plans may contribute to employees’ HSAs to help offset healthcare costs.
Employer contributions are generally tax-deductible.
Employers should ensure the health plan qualifies as an HDHP before offering HSA compatibility.
Payroll deduction options can simplify employee contributions, and the employer must have a Section 125 Cafeteria plan if they plan to make pre-tax contributions on behalf of the employee.
All contributions to an HSA are beholden to the IRS annual maximum contribution limits for single or family, including employer, employee, and wellness contributions.
Important Information for Employees
Employees can use HSA funds for qualified medical expenses for themselves and eligible dependents.
Eligible expenses may include deductibles, copays, prescriptions, dental, and vision expenses. For a complete list, visit IRS Publication 969.
Employees should keep receipts and records for tax purposes.
HSA funds can be reimbursed at any time with records of out-of-pocket expenses. For example, if an employee pays out of pocket for a child's braces, they can reimburse themselves tax-free from the HSA account at any time as long as they have the receipt.
HSA dollars can be invested, and those funds and growth can be spent tax-free on medical expenses. Investment options depend on the administrator of the HSA account and may require a minimum to invest.
Non-qualified withdrawals may be subject to taxes and penalties.
HSA Administrators by Insurance Carrier
Many carriers partner with one or more HSA Administrators. Visit the carrier-specific site to learn more.
CareFirst BCBS: learn.hellofurther.com
United Healthcare: optumbank.com
Kaiser Permanente: healthy.kaiserpermanente.org/pages/hsa-overview
Find a different HSA Administrator using this free comparison tool: hsasearch.com/compare
Frequently Asked Questions About Health Savings Accounts
What can I use my HSA for?
You can use HSA funds for qualified medical, dental, vision, prescription, mental health, and other eligible healthcare expenses as defined by the IRS.
Do HSA funds expire?
No. HSA funds roll over indefinitely and remain in your account until used.
Can I keep my HSA if I leave my employer?
Yes. HSAs are individually owned accounts and remain with you when changing jobs or retiring.
Can I invest money in my HSA?
Many HSA providers offer investment options once minimum account balance requirements are met.
Are employer HSA contributions taxable?
Employer HSA contributions are generally not taxable to employees and are typically tax-deductible for employers.
What happens if I use HSA funds for non-medical expenses?
Non-qualified withdrawals may be subject to income taxes and additional penalties under IRS rules.
Annual contribution limits are set by the IRS and change each year.
Employees should consult a tax advisor or benefits professional regarding individual tax situations.
Not all health plans are HSA-compatible.
This document is intended for general informational purposes only and should not be considered legal or tax advice.
