Before You Start

This guide assumes you have administrator access to your payroll system and a basic understanding of employee benefits.

Overview

25 min
Setup Time
Intermediate
Difficulty
Annual
Maintenance

What You’ll Learn

  • How to set up HSA accounts in your payroll system
  • Handling pre-tax employee contributions correctly
  • Accounting for employer contributions on the P&L
  • Ensuring compliance with IRS regulations

1. Preparation Steps

Before configuring payroll, ensure these general ledger accounts are ready:

Required Accounts

  • HSA Employer Contributions (Expense)
  • HSA Contributions Payable (Liability)

Optional (but recommended)

  • HSA Administrative Fees (Expense)
  • Accrued HSA Contributions (Liability)

2. Choosing Your Contribution Method

You have two primary ways to manage HSA contributions.

Method A: Direct Deposit to Custodian

This method involves directly managing contributions to the HSA custodian.

Pros:
  • Potentially lower fees.
  • Direct control over funds.
  • Simpler for small teams.
Cons:
  • Manual tracking required.
  • Higher potential for errors.
  • Increased administrative burden.

Method B: Third-Party Administrator (TPA)

These are paid services that handle the complexities of HSA administration.

Expert Tip: For larger organizations or those seeking reduced administrative burden, a third-party administrator (TPA) is highly recommended. TPAs handle compliance, record-keeping, and remittance, simplifying the process significantly.

3. Step-by-Step: Payroll System Setup

Here is the high-level workflow for correctly setting up HSA contributions in your payroll system.

Here is a sample code block to illustrate an HSA contribution record structure.

{
  "employee_id": "EMP001",
  "pay_period": "2025-10-01_2025-10-15",
  "employee_contribution_pretax": 100.00,
  "employer_contribution": 50.00,
  "hsa_plan_id": "HSA2025-A"
}

4. Configuring Your Payroll System

  1. 1

    Create HSA Deduction Item

    Set up a new payroll deduction item for employee HSA contributions. Ensure it is marked as ‘pre-tax’ for federal, state, and FICA taxes.

  2. 2

    Create HSA Company Contribution Item

    Establish a separate payroll item for employer HSA contributions. This will typically be an expense to the company and not taxed to the employee.

  3. 3

    Map to General Ledger Accounts

    Link the employee HSA deduction item to your ‘HSA Contributions Payable’ liability account, and the employer contribution item to your ‘HSA Employer Contributions’ expense account.

Common Error: Post-Tax Deduction

Confirm your employee HSA deduction is correctly set as pre-tax in your payroll system. A post-tax deduction will incorrectly reduce taxable income only after taxes are calculated, negating the primary benefit.

5. Testing Your Setup

Testing Checklist

  • Process a test payroll run with HSA contributions for an employee
  • Verify pre-tax deduction is correctly applied on employee pay stubs
  • Confirm employer contributions appear correctly on payroll reports
  • Check that associated GL accounts are accurately debited/credited

Need Help?

Get Support

Having trouble with your setup? Our team can help troubleshoot your specific workflow.

Contact Us