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What is an HSA?
A Health Savings Account (HSA) is a pre-tax savings account for employees enrolled in a qualified high deductible health plan. Those enrolled in HSAs can make tax-free contributions to pay for health insurance costs for themselves and tax dependents— including doctor and hospital visits, co-payments, eyeglasses, prescriptions, certain long-term care insurance premiums and COBRA premiums. They can also contribute to their deductible. Funds within an HSA can rollover from year to year and are eligible to be invested in the stock market.
HSA funds never expire, they carry over year to year and follow employees from employer to employer. That means if your employees enroll in an HSA it stays with them for as long as there is a balance, even through retirement.
Unpaid owners, sole proprietors, partners in a partnership, greater than 2% owners of an S-Corp and their family members are not eligible to make a pre-tax contribution to an HSA, but they can contribute after-tax dollars. Please reach out to Justworks support to set up after-tax contributions to an HSA.
All other benefits-eligible employees enrolled in a High Deductible Health Plan are only eligible for pre-tax contributions. Click here for more information on how to enroll.
Investing in an HSA and retirement planning
HSA funds can be invested in the stock market and gains can be used tax free on qualified expenses. Most HSA’s offer investment options such as mutual funds and certain stocks and bonds that can be invested in to accumulate growth. As funds are used on qualified expenses investments are redeemed or sold and remain completely tax free.
After the age of 65, HSA funds can be distributed for costs not related to medical expenses without incurring the 20% tax penalty. They are however subject to income tax when used for non-medical expenses.
HSA’s offer triple tax savings, the money that is contributed is pre-tax, when used for qualified medical expenses they are tax free, and any associated gains or dividends from investments are also tax free. Since HSA contributions are pre-tax they also lower taxable income for the year.
Is there a deadline for enrollment?
There is no deadline for setting up an HSA. If employees are enrolled in an HSA-eligible plan, they can get started at any time.
Are funds available for use immediately?
With an HSA, employees can only use funds as they contribute them into their account. For example, an employee elects to defer $3,550 across 12 pay periods, after their first deferral, they will only have $295.83 (or $3,550 / 12) available to use. Similar to a savings account, funds cannot be withdrawn above the amount available in the account.
However, the funds saved in an HSA account can be used at any point for a qualified medical expense, as they are not tied to a plan year or employer. That means employees can access their HSA account for qualified expenses indefinitely.
Can an employee change their HSA contribution amounts at any time?
Employees can change their individual HSA contributions at any time. Keep in mind that any changes made will not take effect until the following month.
What are the caps on the HSA contributions?
There’s a cap or limit from the IRS on maximum contributions an employee can make per calendar year.
For 2025, the caps are as follows:
- Individual: $4,300
- Family: $8,550
For 2026, the caps are as follows:
- Individual: $4,400
- Family: $8,750
For 2027, the caps are as follows:
- Individual: $4,500
- Family: $9,000
Participants who are 55 or above can make “catch-up contributions” of an extra $1,000 towards those caps. Contributions are deducted from the second paycheck of each month.
Do HSA funds expire?
No, HSA funds do not expire. HSA funds roll over and do not expire on December 31st (in the way FSA funds do).
When an employee is separated, what happens to their HSA?
Separated employees are no longer able to contribute to their HSA, but employees will always have access to their HSA and can always use any funds in their HSA. Separated employees will not count toward your monthly HSA costs starting the month following their separation. Those fees will then be passed onto the separated employee.
Can I use an existing HSA that I already have with my Justworks account?
You can keep your existing Health Savings Account (HSA), but Justworks does not support direct payroll contributions to an external HSA.
Employees can maintain their previous HSA or can transfer or roll over funds to a new HSA account with Justworks. For more information on how to do this, please connect with your external HSA provider.
What rules do HSA payroll deductions follow?
HSA payroll deductions follow specific processing rules.
Supported payment runs
- HSA contributions can be deducted only on regular, scheduled payroll runs.
- Off-cycle payments (bonuses, commissions, one-time payments) do not support HSA deductions.
Planning contributions
- Set your per-pay contribution to meet your annual target using regular payrolls.
- If you need to contribute outside payroll, you can make a direct contribution to your HSA custodian. Keep your receipt for tax records.
Changing payment type
- Changing a payment’s label (e.g., calling an off-cycle a “regular” run) will not enable HSA withholding. The payroll must be processed in a regular cycle that supports deductions.
Year-to-date tracking
- Payroll-deducted HSA contributions are reflected on your year-end tax forms (e.g., W-2 Box 12 code W).
- Direct (non-payroll post tax only) contributions are reported separately on your personal tax return; consult a tax advisor as needed."
Disclaimer
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.