Health Savings Account Guide For Small Businesses

I love small businesses. From bakeries and convenience stores to clothes shops and estheticians. There’s a unique charm and feeling of doing good when you shop or use the services of a small business instead of a huge corporation.

Getting a cup of coffee and a brioche from your local coffee shop, opened by Italian immigrants, delivers a next-level experience compared to staying in line at Starbuck.

This article is another way of helping out small businesses. If you have a dream that you plan to develop into a business, it’s essential to know all your options about safety, savings, and health insurance you can use. It’s crucial to secure your self, your health, and your staff. After all, they’re the people working on your dream.

Sickness can catch us by surprise and pile up a mountain of unpaid bills. Preparing for the worse isn’t fun at all, but it’s a must.

As a small business owner, you must think about how you and your staff will be best protected and prepared in an inevitable situation. Establishing Health Savings Account or HSA for you and your employees is a significant step to becoming more financially stable, save money, and be prepared for the worst.

Health Savings Account is a tax-advantaged personal savings account that you personally control and can be used for a wide array of medical expenses. To be eligible for an HSA, a person must be under a high-deductible health plan.

What Is A Health Savings Account (HSA)?

What is a Health Savings Account?

An HSA works the same as personal savings account designed to reduce health care insurance costs for you as an owner and your employees. You can use the money you contribute to an HSA for medical care, doctor visits, vision and dental care, prescription drugs, and long-term medical expenses. Most over the counter drugs are not covered by an HSA, like vitamins, minerals, or toothpaste.

The deposited money is not subject to federal tax.

How Does An HSA Work?

With an HSA, you get to contribute a specific amount that’s tax-deductible, and all withdrawals you make to pay for eligible medical expenses are tax-free. The amount is different every year.

In 2019, an employee contributed up to $3,500 for an individual and $7,000 for a family HSA. Contributions within this limit are tax-deductible from your gross income.

The minimum annual deductible for 2019 was $1,350 for self-only coverage or $2,700 for family coverage. An HSA holder over the age of 55 has the option of making “catch up” contributions of an additional $1,000.

At the end of each year, the money left in your HSA account rolls over. You don’t lose it ad aren’t obligated to spend it. You earn interest on the money you have in your HSA.

After the age of 65, an HSA account can be used as an IRA account. You can withdraw money from it, and you’ll pay income tax on each withdrawal. If you withdraw money from the HSA before you reach 65, you’ll pay 20% taxes on them.

An HSA account offers you the benefit of assigning a beneficiary to your account. If your beneficiary is your spouse, they can continue to use the HSA even if they’re not under a high deductible health plan. If another person is your beneficiary, they get a distribution after your passing that’s considered a taxable income.

HSA Eligibility

HSA Eligibility

To be eligible for an HSA, all you need is to be enrolled in a high deductible health plan. HDHP are plans that have a higher deductible than traditional insurance. You pay lower monthly premiums but pay more health costs yourself.

By 2021 the minimum deductible for a single HDHP is $1,400, and for a family, it’s $2,800. This is the minimum amount you have to pay for health care services and items before your insurance starts to pay.

The maximum out-of-pocket costs for 2021 are $7,000 for a single HDHP and $14,000 for a family HDHP. This is the most you’d have to pay if you have more extensive medical costs.

Combining an HDHP with an HSA allows you to save up more for healthcare services and items you’ll need later. Since your HSA balance rolls over, you can build a nice amount that will earn you interest and pay for future medical costs tax-free.

How To Set Up An HSA For Your Employees

How To Set Up An HSA For Your Employees

Health Savings Accounts have gained more popularity among business owners and employees over the last 5 years. Out of all small businesses, only 21% offer HSA, while merely 16% contribute money to their employee’s HSA.

As a business owner, you need to follow a couple of steps to set up an HSA for your business and employees.

  1. Step one is to check if your employees are eligible for an HSA. Suppose you don’t offer them a health insurance check if they’re enrolled in an HDHP plan. Then decide on the HSA contribution amounts for employees with qualifying HDHP. This is also the step when you decide if you’ll contribute to your employee’s HSA.
  2. Step two is to create a Section 125 plan that enables your employees to make tax-free contributions to their HSA. The plan can be made available to the spouse and dependents of the employees. Either your business or another service can create the Section 125 plan.
  3. After implementing the Section 125 plan, the final step is for you and your employees to choose a bank or an insurance company as your HSA custodian and send your contributions to them-if you decided to contribute. Contributing to your employees, HSA brings tax advantages to your business. The business needs to prepare the appropriate tax files like W-2 for the employees at the end of the tax year.

Pros And Cons Of An HSA

Pros And Cons Of An HSA

Before you decide on an HSA for you or your employees, let’s compare the advantages and disadvantages.

Pros Of Owning An HSA

  • A large list of qualifying expenses; you can include any medical cost defined by the IRS, medical expenses you paid for yourself, your spouse or dependent, even dental and sight items and drugs qualify;
  • Anyone can contribute to your HSA; as long as your contributions are within the limit set for the year, an employer, relative, or partner can contribute to your HSA;
  • Most HSAs come with a debit card, so paying for medical expenses is straightforward;
  • An HSA earns you interest; although it ranges between 0.1% and 0.20% depending on your balance, the accumulated interest is tax-free;
  • You get tax-free withdrawals for covering medical expenses;
  • Tax-deductible after-tax contributions; if you haven’t reached the HSA limit for the year, you can contribute before filing your taxes to lower your tax bill;
  • Money rolls over at the end of each year, so you can easily save up for more significant medical expenses of using the HSA as an IRA after reaching 65 years even if you change your health insurance plan or employer.

Cons Of Owning An HSA

  • Mandatory HDHP can put a significant financial burden;
  • Some HSA has a monthly maintenance fee or charges each transaction, so beware;
  • It would be best if you kept receipts from medical items and expenses you used your HSA for in case of an IRS audit;
  • If you withdraw money for non-medical related expenses before you turn 65, you will be charged a 20% tax;
  • It’s easy to get obsessed with saving up, so some people might be reluctant to spend money out of their HSA, even for necessary medical expenses.


Health Savings Account and Flexible Savings Account are both pre-tax accounts that can be used for healthcare-related costs, so they’re often put in the same box.

With an HSA, you can only spend already saved money, and they roll over at the end of each year. With FSA, you get a line of credit so you can spend money you currently don’t have to obtain a medical item as long as you save the money by the end of the year.

You also lose any remaining balance at the end of the year.

Bottom Line

What distinguishes small businesses from large corporations is their personal dedication to clients and employees. As a small business owner, you must pay attention to your employee’s wellbeing, financial situation, health expenses and provide them with the option of an HSA.

Healthcare is a necessary expense and not having to worry about it now or in retirement is a great relief.

Not to forget all the benefits you as a business owner gets by setting up and contributing to an HSA, like federal income tax deductions and saving money.

Happier, more content employees reflect their emotions in the workplace. So going that extra mile will result positively in your business’ future.

Are you a small business owner? Have you considered an HSA for you or your employees?

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