HSA Accounts for Small Business Owners

healthy living habits

HSA accounts, short for health savings accounts, are a type of tax-advantaged savings account used to save money on medical costs. If you have a qualifying high-deductible health plan (HDHP), you can sign up for an HSA account and contribute to save big on your taxes. If you don’t know what HSA accounts are or how they work, follow along with this guide to learn more about how small business owners can sign up and get started with their own tax saving HSA.

What are HSA accounts?

HSA is an acronym for health savings account. HSA accounts are a type of savings account used to save and invest for medical expenses with a tax advantage. These accounts allow you to save with pre-tax dollars (like a 401(k) or traditional IRA) and use those funds tax-free (like a Roth IRA) for eligible healthcare-related costs. Eligible costs generally include doctor visits, hospital bills, doctor ordered lab tests, and prescribed medications.

HSA accounts are unique in that they let you both contribute and withdraw tax-free. Most retirement accounts and other tax-advantaged savings accounts allow you to either contribute or withdraw tax-free, not both. And HSA accounts are not just bank savings accounts with special tax rules, they allow for investments as well, which gives you a tax-free option to invest over either a long or short-term time horizon.

Can I open an HSA account?

HSA accounts are designed solely for those with a high deductible health plan (HDHP). This is defined by the government as a health insurance plan with a deductible of at least $1,350 for an individual or $2,700 for a family. To be eligible, the health plan must have an out-of-pocket maximum of $6,650 or lower for an individual and $13,300 for a family for everything except out-of-network services. If you have a health insurance policy that fits in those broad guidelines, you can open an HSA account to save on your taxes. Also keep in mind that you can’t use both an HSA and a healthcare FSA (flexible spending account) at the same time, but that shouldn’t be an issue for most small businesses.

Some insurance companies have a preferred HSA vendor. For example, United Healthcare owns Optum Bank and uses it as a preferred HSA provider. But you are not limited to any specific HSA provider. The trouble is finding a good one that you are happy to use that offers both low fees and good investment options. I personally signed up for an Optum Bank account when I was a United Healthcare customer and still use that HSA even though I moved to a different state and have a different health insurance company. But that does not necessarily make Optum Bank the best HSA provider, it just worked well for me.

Doing a search on Google should help you find the best account for your needs.

Using HSA accounts to save as much as possible

Depending on how you look at it, HSA accounts give you a triple tax savings advantage. They let you save on taxes on following:

  • Pre-tax contribution
  • No tax on investment gains
  • Tax-free withdrawal

This is huge tax savings! Personal finance blogger Mad FIentist did a great article on how to use HSAs as a type of retirement account. This means missing out on some tax savings in the short-term to focus on massive tax savings in the long-term. Here is a basic rundown of how it works.

If you contribute the maximum each year, HSA accounts work like a retirement account with pre-tax contributions. You can add to the account each year, invest the funds in your favorite low-cost index fund, and watch it grow for years. And while you can reimburse yourself or pay for medical expenses in the year they are incurred, you don’t have to take the reimbursement right away. You can save your medical bills in a file or track them in a spreadsheet for decades while never drawing on the HSA balance.

This lets your HSA grow just like a retirement account, ideally reaching a bigger and bigger balance each year and growing a “healthcare expense” nest egg for retirement. When you reach retirement, you can withdraw at any schedule you want up to the total of your past medical bills. If you spend $3,000 per year on medical bills over 20 years, that is $60,000 in tax-free withdrawal standing by. Because you already paid the medical bills, this is essentially free cash you can do whatever you want with.

If there is anything left over, don’t fret that you won’t be able to use it. The average retiree needs over a quarter million dollars for medical costs.

HSA accounts are great for small business owners

Small business owners often don’t save as much for retirement as their full-time employed counterparts, but you can hack the HSA to act as a retirement account for you, or at least save big on medical expenses by making the costs tax free. I had two tax-free babies paid for by an HSA and laser eye surgery paid for by an FSA. Those three costs alone saved me over $3,000 on taxes, and that is just scratching the sufrace on what’s possible. With an HSA, you will definitely save on taxes. The only question is how much you will save.