HSAs for Business Owners

Written by Coach Janelle CPA on September 22, 2023

When enacted, the Affordable Care Act (ACA) eliminated most small-business health plans that reimbursed individually purchased health insurance. Consequently, many small business owners with fewer than 50 employees chose health savings accounts (HSAs) or opted to provide no health coverage at all.

As of 2022, over 35 million HSAs were active, with assets amounting to $104 billion. A 2022 Devenir survey expects this to increase to 43 million accounts with $150 billion in assets by 2025.

HSA basics:

1. To open an HSA, you must have high-deductible health insurance.

2. 2023 contribution limits are $3,850 for individuals and $7,750 for families. These limits increase slightly in 2024.

3. If you’re 55 or older by the end of the year, you can contribute an extra $1,000.

4. HSAs come with substantial tax benefits, including deductible contributions, tax-free earnings, and tax-free withdrawals for qualified health expenses.

Monies taken from HSAs are tax-free when used for qualified medical expenses. If you don’t use the funds for medical expenses, those funds grow. Once you reach Medicare age, you can either

1. withdraw the funds and pay taxes, or

2. use the funds tax-free for medical expenses.

You generally cannot make HSA contributions if you have a non-high-deductible health plan that overlaps with the high-deductible plan. Similarly, you cannot contribute to an HSA and a general-purpose healthcare flexible spending account (FSA) in the same year.

HSAs are similar to IRAs. They are trust or custodial accounts you set up at banks, insurance companies, or brokerage firms. The purpose of your HSA is solely to pay your qualified medical expenses. Like IRAs, HSAs can offer various investment options, though some trustees might limit choices to more conservative options.

The benefits of HSAs have grown significantly in recent years, making them a mainstream and advantageous choice for many. Given their tax advantages and flexibility, the HSA could be a good fit for you as a business owner.

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