Definition of Health Savings Account (HSA)

health spending account

A health savings account (HSA) is an employee benefit employers provide to their workforce. An HSA allows employees to deduct pre-tax money from their payroll to pay for health care expenses.

What is a Health Savings Account (HSA)?

The definition of a health savings account, also known as an HSA, is that it’s an employee benefit program that lets employees contribute pre-tax money through payroll deductions to pay for certain health care expenses. Employees can enroll in the benefits program to reduce the costs of their health care bills.

HSAs are available only with high-deductible health plans. Employers may contribute to their employees’ HSAs, and will not be required to pay wage taxes on those contributions.

Why is a Health Savings Account (HSA) important to small businesses and HR Leaders?

All employees want to have good health care and health insurance. With an HSA program, employers can attract talent to their company. Employee benefits are generally an excellent way to attract talent from the marketplace to your company. Providing HSA to your employees falls into those categories.

With an HSA, employers can deduct the pre-tax money from their employee’s wages. This creates a win-win situation for both the employee and the employer.

The employee will have a lower medical expense on their medical bill if they need to use their health insurance. The employer won’t have to pay tax on this deduction, so they will save money by providing an HSA to their employees.

What is the history of the Health Savings Account (HSA)?

The first health savings accounts (HSA) were discussed in the 1980s. The first plans, called the Medical Savings Accounts (MSA), were tried through an experiment in 1996.

With the introduction of Health Savings Accounts (HSA) in 2003, the MSA was deemed obsolete, and the HSA took over all the health savings in the country.

HSAs combine the concept of both Roth 401(k) and IRAs for medical expenses the employees might have. The employee receives a 100% income tax deduction for their HSA contributions (in that same taxable year) to their HSA bank. Also, the employee can withdraw the funds if they need them for qualified medical expenses.

When can I set up an HSA plan?

If your company is offering an HSA-compatible, high-deductible health plan (HDHP), you can set up an HSA at any time. Your HSA plan’s start date depends on when you finish setting up your high-deductible health plan. Employers must finish setting up the HSA:

  • On or before the 15th of the month, the employee’s plan will be eligible to start on the 1st of the following month.
  • After the 15th of the month, the employee’s plan will start on the first of the month after the next (1-1.5 months later).

Employees will have until the 25th of the enrollment month to begin contributions on the first of the following month. If the employee’s enrollment is completed after the 25th, the plan will start on the first of the month after the next.

Are there contribution limits for an HSA?

The IRS (Internal Revenue Service) places limits on the maximum allowable annual HSA contributions.

The table below outlines the single and family annual contribution limits for HSA. Remember that the total combination of employee and employer contributions cannot exceed this amount.


  • Single (no dependents) $3,850
  • Family (dependents included) $7,750


  • Single (no dependents) $3,650
  • Family (dependents included) $7,300


  • Single (no dependents) $3,600
  • Family (dependents included) $7,200

The maximum annual contributions have grown yearly, both for individuals and dependents. An employee’s dependents must be enrolled in the employee’s medical insurance to qualify for the family contribution limit.

Catch-Up Contributions

Participants age 55 or older may make additional contributions beyond the maximums above.

  • Single: $1,000
  • Family: $1,000

Other terms similar to HSA that can assist you

  • High Deductible Health Plan (HDHP). A High Deductible Health Plan (HDHP) is a health care plan where the monthly premium that the employee pays isn’t as high compared to lower deductible plans. Still, the deductible for an HDHP is relatively high. This is better for younger employees who don’t have that many regular health care costs.
  • Flexible Spending Account (FSA). A Flexible Spending Account (FSA) works similarly to an HSA. It’s an account where the employees save on their taxes since the contributions are pre-tax, and the qualified expenses for the account are usually health care related. The one significant difference from an HSA is that FSA accounts are employer-sponsored, and the employee has to spend the funds if they’re changing employers. On the other hand, HSA accounts are owned by employees, so they take the money with them no matter who their employer is.

Summary of HSA

A Health Savings Account (HSA) is an excellent employee benefit that employers can provide their workforce. The account has the purpose of lowering the health care, medical fees, and expenses the employee might experience with their health care plan.

The coverage of the plan is gained by the pre-tax money from the employee’s salary deductions. The funds are usually held in an HSA bank. Employees can use them for any eligible medical expenses to lower their medical bills.

The HSA contribution limit per annum (taxable year) for 2023 is $3,850 per person or $7,750 if the family (including dependents) is enrolled in the employees’ medical plan coverage. The maximum coverage for the health plan changed (increased) over the years.

An HSA can be a good employee benefit employers can use to attract great talent. It also benefits employees who can reduce their medical expenses with their HSAs.

Similar glossary definitions you must know:

  • Consolidated Omnibus Budget Reconciliation Act (COBRA). A Consolidated Omnibus Budget Reconciliation Act (COBRA) is a program that allows employees to still receive benefits from their employer even if they change their role from full-time to part-time employment. COBRA coverage usually lasts up to 18 months.

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