Health Savings Accounts (HSAs) have become increasingly popular among small business owners, and for good reason. The Affordable Care Act (ACA) eliminated small-business health plans that reimbursed employees for individually purchased insurance unless those businesses had a group plan in place. As a result, many owners of companies with fewer than 50 employees found themselves with two main choices: offer no health coverage at all or set up some form of HSA. For those without employees or who opted out of group health plans, individual HSAs became a practical and tax-advantaged solution. In this way, the ACA indirectly encouraged small business owners, especially solo operators or those with very small teams—to embrace HSAs for their personal health coverage needs.
Tax benefits of HSA for small business owners
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HSAs Are on the Rise—Here’s Why That Matters for Small Business Owners
Health Savings Accounts (HSAs) are no longer a niche option—they’ve gone mainstream. According to a March 2023 report from Devenir, a leading HSA industry research firm, the number of HSA accounts in the U.S. topped 35 million by the end of 2022, holding a combined $104 billion in assets. That marks a 9% increase in accounts and a 6% increase in assets from the previous year—even with a turbulent stock market.
HSAs are becoming a go-to tool for self-employed and small business owners to manage healthcare costs while taking advantage of powerful tax benefits. If you’re eligible to open an HSA, now is a great time to consider it. We’ll break down the reasons for this in the sections ahead.
Health Savings Accounts (HSAs) Basics: What You Need to Know
To open a health savings account (HSA), you must have a high-deductible health plan (HDHP). Once you have qualifying insurance, you can contribute to an HSA—a powerful tool that combines savings, retirement, and healthcare benefits in one account.
Contribution Limits for 2025
- Self-only coverage: Up to $4,300 in deductible contributions
- Family coverage: Up to $8,550
- (“Family coverage” includes any coverage that’s not self-only.)
If you are married and one spouse has family coverage, both spouses are treated as having family coverage for the purpose of HSA contributions.
Additionally, if you are 55 years old or older by the end of the year, you are allowed to contribute an extra $1,000 as a catch-up contribution.
Contribution Limits for 2026
- Self-only: $4,400
- Family: $8,750
What Counts as a High-Deductible Health Plan in 2025?
To be eligible, your plan must have:
- A minimum deductible of $1,650 (self-only) or $3,300 (family)
- A maximum out-of-pocket limit (including deductibles) of $8,300 (self-only) or $16,600 (family)
The tax advantages of Health Savings Accounts (HSAs)
- Contributions are tax-deductible. You get to reduce your taxable income.
- The growth in an HSA (Health Savings Account) is tax-free. This means that any interest or investment gains earned within the account are not subject to taxation.
- Withdrawals are tax-free if used for qualified medical expenses.
That’s a rare triple tax benefit—hard to beat!
Now, let’s dive into the details that make HSAs especially attractive for small business owners.
HSA Contribution Tax Rules: What to Know
One of the biggest perks of contributing to a Health Savings Account (HSA) is the tax break—and the rules around it are pretty straightforward.
HSA Contribution Deadline
You have until April 15, 2026, to make contributions for the 2025 tax year—the same deadline as for IRA contributions. This gives you extra time to plan and maximize your tax benefits.
Above-the-Line Deduction
HSA contributions are above-the-line deduction, meaning:
- You can deduct them even if you don’t itemize on your tax return.
- They lower your taxable income, no matter your income level—even for high earners.
As long as you’re covered by a qualifying high-deductible health plan (and meet the other eligibility criteria), you’re entitled to contribute and enjoy the tax savings.
Key Restrictions for Health Savings Accounts (HSAs)
- You can’t contribute to an HSA if someone else can claim you as a dependent on their federal tax return.
- You’ll need to use IRS Form 8889 (Health Savings Accounts) to calculate your contribution limit and report it with your tax return.
Bottom line: HSAs offer flexible, tax-advantaged savings with fewer income restrictions than other tax shelters. If you qualify, it’s a smart move to take full advantage.
How HSA Eligibility Works Month by Month (And the Exception You Need to Watch Out For)
When it comes to contributing to a Health Savings Account (HSA), eligibility is determined on a monthly basis. That means if you only have a qualifying high-deductible health plan (HDHP) for part of the year, you can still contribute—but only 1/12 of the annual limit for each month you’re eligible.
To count for a given month, you must be enrolled in a qualifying HDHP as of the first day of that month.
The Big Exception: Year-End Rule
Here’s where it gets interesting. If you’re eligible as of December 1, you can contribute as if you were eligible for the entire year—even if you only had the HDHP for that one month. This is called the “last-month rule.”
Sounds like a win. It can be—but there’s a catch.
The Testing Period Trap
To keep the full-year contribution benefit under the last-month rule, you must stay HSA-eligible for the next 12 months—all the way through December 31 of the following year. This is known as the testing period.
If you lose eligibility at any point during that time, the IRS can hit you with:
- A recapture tax (you’ll have to pay income tax on the extra contributions), and
- A 10% penalty on top of that.
You May Be Able to Deduct 100% of Your HDHP Premiums
If you’re self-employed or own a small business (such as an S Corp), there’s another valuable tax break to know about—the ability to deduct your high-deductible health insurance premiums.
You can usually claim a 100% above-the-line deduction for these premiums if you operate as:
- A sole proprietor
- A single-member LLC taxed as a sole proprietorship
- A partner in a partnership or an LLC taxed as a partnership
- A shareholder-employee of your own S corporation
This deduction applies in addition to your HSA contributions and can significantly reduce your taxable income.
Quick Reminder about HSA rules
To qualify for HSA contributions, you must have a high-deductible health plan (HDHP)—and the insurance and the HSA itself are usually handled through two separate companies. So don’t be surprised if your health plan provider and HSA account administrator are different.
HSA Tax Strategy for S Corp Owners: How to Use an Individual HSA and Get Reimbursed for Health Insurance
If you own more than 2% of an S Corporation and have a high-deductible health plan (HDHP), your S Corp cannot directly contribute to your Health Savings Account (HSA). Instead, follow these steps:
1. Open and fund your own individual HSA; the S Corp cannot contribute directly.
2. The S Corp can reimburse you for 100% of your health insurance premiums by paying them and including the amount as wages on your W-2. This reimbursement is subject to income tax but not to Social Security or Medicare taxes.
3. You can then deduct these premiums on your personal tax return as a self-employed health insurance deduction (above-the-line).
4. Additionally, you can contribute personally to your HSA, up to the annual limits, and claim that deduction on your tax return.
By following this approach, you can effectively manage your health expenses while taking full advantage of the tax benefits available to you.
How to Use HSA Funds—and Avoid Costly Mistakes
Health Savings Accounts (HSAs) are more than just a tax shelter—they’re a powerful tool for covering healthcare costs now and in retirement. Here’s how to use them wisely.
Tax-Free Withdrawals for Medical Expenses
Those withdrawals are entirely tax-free if you use your HSA funds to pay for qualified medical expenses—for yourself, your spouse, or your dependents.
You can:
- Use the money immediately to cover out-of-pocket medical costs or
- Let it grow over time. Contributions and earnings stay in the account and continue to grow tax-free if you don’t use them.
HSA = A Health-Backed Retirement Account
If you’re in good health and don’t need to tap your HSA every year, you can build a tax-free medical reserve fund for later in life.
Once you reach Medicare eligibility age (typically 65):
- You can withdraw money for any reason without the 20% penalty (though non-medical withdrawals will still be taxed).
- You can still withdraw tax-free to pay for uninsured medical expenses.
- You can use HSA funds to pay Medicare premiums (but not Medigap policies).
What Happens When You Die?
- If your spouse is your beneficiary, they can inherit the HSA and treat it as their own—tax-free.
- If someone else inherits it, the account becomes taxable to them as of your date of death.
HSA Warnings to Watch
- Timing matters: You can’t use HSA funds for medical expenses incurred before the account was opened.
- Non-medical withdrawals before age 65 are taxable and hit with a 20% penalty.
- You can’t use HSA funds for regular insurance premiums—only for:
- Long-term care insurance
- COBRA continuation coverage
- Health insurance while receiving unemployment benefits
- Medicare (except supplemental/Medigap plans)
What Other Health Coverages Can Disqualify You from Contributing to an HSA?
If you’re a small business owner or self-employed professional trying to maximize tax savings through a Health Savings Account (HSA), here’s a critical point to keep in mind:
Not all health coverage plays nicely with an HSA
Even if you’re enrolled in a qualifying high-deductible health plan (HDHP), having additional coverage could block your ability to contribute to an HSA—costing you valuable tax deductions and benefits.
Let’s break it down.
The Golden Rule: No Overlapping Coverage
To contribute to an HSA, you must be covered only by a high-deductible health plan. That means you can’t have any other health insurance that provides benefits similar to your HDHP—even if it’s a secondary plan through a spouse or other source.
If another plan covers the same medical expenses as your HDHP, you’re disqualified from contributing to your HSA.
What Doesn’t Hurt Your HSA Eligibility?
Thankfully, the IRS makes a few exceptions. The following types of coverage won’t interfere with your HSA eligibility:
- Plans limited to preventive care
- Workers’ compensation insurance
- Insurance for specific diseases or illnesses (like cancer or critical illness policies)
- Hospital indemnity insurance that pays a fixed daily or per-stay amount
So, if you carry one of these policies alongside your HDHP, you’re still in the clear.
HSAs vs. FSAs: A Problematic Mix
Here’s a common (and costly) mistake: You cannot contribute to an HSA if you’re also covered by a general-purpose Health Care Flexible Spending Account (FSA)—even if it’s through your spouse’s employer.
Why? Because FSAs are considered another health plan that reimburses for the same types of expenses as your HDHP. That disqualifies you from making HSA contributions for the entire FSA plan year.
But it gets worse…
Beware the FSA Carryover Trap
Even if you don’t make a new FSA contribution, you can still lose HSA eligibility if you have an FSA balance carried over from the previous year. According to the IRS, you’re treated as having FSA coverage for the entire year if there’s a carryover—no matter how small. In other words, a $10 FSA carryover can block thousands in potential HSA contributions and tax savings.
How to Establish a Health Savings Account (HSA)
Setting up a Health Savings Account (HSA) is straightforward and similar to opening an Individual Retirement Account (IRA). You can open an HSA at a bank, insurance company, brokerage firm, or any IRS-approved institution. It’s important to note that the account must be used exclusively for paying qualified medical expenses—not only for yourself but also for your spouse and dependents.
Just like with IRAs, you have until the tax filing deadline—usually April 15 of the following year—to open an HSA and make contributions for the previous tax year. For example, if you are eligible for the 2025 tax year, you have until April 15, 2026, to open an HSA and make deductible contributions for the year 2025.
To get started, you need to complete either IRS Form 5305-B (Health Savings Trust Account) or Form 5305-C (Health Savings Custodial Account). These forms are quick to fill out and do not need to be filed with the IRS, but it’s essential to keep them with your important tax documents for future reference.
