Employer-sponsored medical insurance (referred to as “major medical” insurance) is essential to many Americans for protection from the high costs of medical care. High-deductible health plans (HDHPs) have become a standard offering for many employers because they help reduce the cost of offering medical coverage, but they do result in employees covering more initial costs out-of-pocket before they reach their deductible. Health savings accounts (HSAs) were introduced to help employees pay for these increasing out-of-pocket costs—and save and invest to be better prepared for costs in the future.
As we’ve discussed with supplemental health and disability insurance products, there are tax implications to these benefits that may be helpful to understand when tax season approaches.
Let’s look at the key tax considerations around employer-sponsored major medical premiums and HSA contributions and withdrawals. Note that this information is related to employer-sponsored coverage only. Different rules apply for self-employed insurance purchasers.
Employer-sponsored major medical premiums
Premiums paid for major medical insurance by both the employer and employee are deducted pretax from your income.1 This means you can’t deduct premium costs from your taxes, but your taxable income has already been reduced.
Health Savings Accounts (HSAs)
Many employers contribute to their employees’ HSAs to help balance the out-of-pocket costs of a high-deductible health plan. Employees can make additional contributions up to an annual limit (in 2025, limits are $4,300 for individuals and $8550 for families).2
- Employer contributions are pretax and excluded from your taxable income.3
- Personal contributions are tax-deductible if made with after-tax dollars.
- Withdrawals are tax-free if used for qualified medical expenses.
- Non-qualified withdrawals incur a 20% penalty and are taxed as income.
Case study: Meet James
Examples are for illustrative purposes only and are meant to provide a general overview of how coverage works. Any resemblance to actual persons is purely coincidental.
James, an IT consultant, is enrolled in a high-deductible health plan (HDHP) through his employer and recently opened an HSA. He’s excited about the savings and tax benefits, but he wants to ensure he’s maximizing its value and avoiding any penalties. He meets with a tax professional, who explains the following:
- Contributions: James can contribute up to $8,550 in 2025 for his family’s HSA in 2025, and his employer’s contributions count toward this limit.
- Withdrawals: James can withdraw funds tax free from his HSA for qualified medical expenses, such as copays for doctor visits or prescriptions. However, non-qualified withdrawals incur a 20% penalty plus income tax until James turns 65.
- Growth opportunity: Any funds James doesn’t use in his HSA can grow tax-free for future medical expenses.
Feeling confident, James maximizes his contributions and sets up a portion of his account for long-term investment, turning his HSA into a powerful retirement health care fund.
Be prepared
Understanding major medical premiums and HSA benefits can help you anticipate the tax implications of your coverage so you can minimize health care costs while maximizing savings. Always consult a tax or financial professional to align strategies with your financial goals.
This is a high-level overview of the taxation of major medical insurance and HSAs. For specific information please consult a tax professional and/or your benefits representative.
Additional reading:
Some supplemental benefits are taxable—learn what they are to help avoid surprises
