Can a Business Owner Participate in a Health Savings Account?
Business owners are gearing up for open enrollment, the yearly period when employees choose their benefits and enroll in a new health insurance plan, or make changes to their current plan. It’s a stressful time… and if you’re a business owner, it may be even more stressful, as your employees have probably begun to come to you with questions…
But chances are: you have questions, too! If you’re offering a health savings account (HSA) to your employees, you may wonder if you can also participate in this super savings mechanism.
The simple answer? Yes!
But… there are limitations you should know about to ensure you stay compliant with the IRS.
HSAs are Great Investments
HSAs are like personal savings accounts, but the money in them is used to pay for eligible health care expenses, which is how they get a “tax preference”. I.e. you don’t have to pay taxes on the money you put into an HSA.
In order to be eligible for an HSA, you must also have a high deductible health plan (HDHP). Employers who provide their employees with an HDHP often offer HSAs to help offset the higher deductible of the health insurance plan.
So, You’re Considering An HSA
One reason you’re considering getting an HSA is that you’ve heard they’re a great deal. And you’re right. They are! HSAs are the most tax-advantaged investment option for medical expenses and retirement. Contributions to an HSA aren’t taxed, funds grow tax-free, and distributions for qualified medical expenses aren’t taxed either. A triple-win!
Business Owners Can’t Receive Pre-Tax Contributions
As you know, a business owner is treated a bit differently than an employee in the federal tax code.
Most employers offer a payroll deduction through a Section 125 Cafeteria Plan, allowing an employee to contribute to an HSA on a pre-tax basis. So here’s where the rules come into play.
Federal tax laws prevent self-employed people from participating in cafeteria plans. This means that any business owners considered self-employed under the tax code cannot make pre-tax contributions to HSAs in the same manner as regular employees.
Business owners not allowed to participate in cafeteria plans include:
- Sole proprietors of sole proprietorships
- Partners of partnerships
- Shareholders of S-Corporations owning more than 2%
- Any children, parents, and grandparents of shareholders of S-Corporations owning more than 2%
How Business Owners Can Participate in an HSA
Alas, there is a way for you to enroll in an HSA!
As a business owner, you can establish an HSA and contribute to it in an after-tax manner. This means that as a profitable business, you can still take a deduction on a personal tax return, but not deduct the expense as a business deduction. It’s set up this way because you aren’t allowed to claim tax-exemption twice, once as an individual and once as a business owner.
The only restriction here is the initial tax treatment of contributions to your account. Otherwise, like any other HSA owner, you get all the advantages of this savings powerhouse, including investing your balance and getting reimbursed for medical expenses.
Whatever you contribute towards your HSA will reduce your adjusted gross income, which is how your HSA helps you save money on taxes. Please note that in 2020, the maximum HSA contribution limit will be $3,550 for an individual and $7,100 for a family. People over age 55 are allowed to contribute $1,000 more. To learn more about contributions, take a peek here.