HSA for Small Business – What You Need to Know

hsa for small business

Small business owners and their employees can stretch their dollars further by establishing a health savings account. With a health savings account, participants are empowered to save earnings and more wisely spend money on healthcare expenses. While it might be easy to assume this tax-advantaged account is a benefit available only to large companies, the option is also a possibility for small businesses.

What is a Health Savings Account?

What is a health savings account HSA, and why is it a good option for small businesses? An HSA is a tax-advantaged medical savings account that allows participants to save pre-tax dollars for future qualified medical expenses.

By using untaxed dollars to pay for health care costs like health insurance copays and deductibles, dental and vision expenses, prescription drugs, and certain other healthcare costs not covered by insurance, qualifying U.S. participants can stretch their earnings further while ensuring they have the funds they need when healthcare expenses arise. Balances can be carried forward from one year to the next, unlike some other health reimbursement arrangements.

Unlike a flexible spending account, an HSA is only available to individuals with a qualifying health insurance plan such as a high deductible health plan. Contributions are made into the account by either the individual or their employer – or both, and there are annual contribution limits each tax year. Offering a health savings account combined with an HDHP is a more affordable health benefit option than traditional health coverage.

Can a Small Business Have an HSA?

Even though small businesses with fewer than 50 employees are not required to offer health insurance as part of their benefits package, many choose to provide their workers with health savings accounts and a high deductible health plan.

Not only does offering an HSA create a positive benefit for employees, but employer contributions are also tax-deductible. Since HSAs have no contribution minimums, however, small business owners can choose exactly how much to fund, and employees are free to prepare for medical expenses and add their own pre-taxed funds to the total, all of which can be handled directly through payroll deductions.


Benefits of Health Savings Accounts

What’s so great about HSA for small business? Americans insured by a high deductible health plan can benefit from a health savings account in a variety of ways, including:

1. Pay for Many Qualified Medical Expenses

HSA account holders can use the funds to pay for a variety of qualified medical expenses, including deductibles and copays, dental expenses, vision costs like eyeglasses and prescription drugs. The HSA offers the peace of mind that when future medical expenses are incurred, money is there to help pay for them.

2. Save on Taxes

Multiple Internal Revenue Service tax advantages exist for establishing a health savings account. When an employer adds tax-free money to an employee’s account, the donation can be claimed as a federal income tax deduction. When an employee deposits money into the account, it generally occurs as a payroll deduction in pre-tax dollars, so it reduces the employee’s taxable income. Then, when HSA money is used for qualified medical expenses, the funds are tax-free distributions.

3. Stretch Your Dollars

HSAs allow participants to spend more of their hard-earned money. By depositing pre-tax dollars into a health savings account, participants can make their dollars stretch further. Otherwise, the same amount of money will be taxed, reducing the amount that could be spent on healthcare costs. While in the HSA account, the money even earns tax-free interest.

4. Control Healthcare Spending

An HSA allows participants to control their healthcare spending. By saving money in an HSA account, employees can decide how and when it’s used, including any employer contributions. The money belongs to the participant forever, and funds do not expire if not used in a certain tax year. Employees can even take the funds with them if they change jobs or health plans.

5. Invest for Retirement

Once an HSA participant reaches retirement age, they can use their funds for other purposes without a tax penalty. Many account holders will choose to invest the HSA money into mutual funds to help support them in their golden years. Or, they can save the funds indefinitely to plan for future healthcare costs.

Best Health Savings Account Options

Perhaps you’ve researched health savings accounts, compared to flexible spending accounts and other health care coverage, and you’ve decided an HSA is the best choice for your small business. Maybe you’ve even pored over health insurance acronyms trying to understand it all. Now it’s time to choose through what financial institution you’ll establish the HSA. Fortunately, a variety of options are available, each with its own benefits. Some of the most popular HSA choices include those from:

1. HealthEquity

Named one of the best financial institutions to provide HSAs, HealthEquity is popular since it lets customers invest in Vanguard funds with low expense ratios. HSAs with HealthEquity feature a mobile app with no account management fees, and the company offers accounts with no minimum investment threshold, so every dollar added to the HSA is invested right away.

2. The HSA Authority

The HSA Authority is a great option for family coverage thanks to its extensive online account management options that let users delegate financial tasks to other members. The online portal also features other web-based services including online bill pay, text banking, mobile deposits, and e-statements.

3. HSA Bank

It’s simple to open an HSA with HSA Bank thanks to no required minimum balance, and the task usually can be completed in less than 10 minutes. Users can invest their funds into TD Ameritrade or Devenir, and health savings accounts through HSA Bank feature no account management fees with at least a $3,000 balance.

4. Lively

With no fees to open or maintain an HSA, Lively is a great choice for opening a health savings account. Users can easily open and fund their accounts online, and they can invest their funds with TD Ameritrade. Lively’s mobile app even lets users track their HSA funds on the go, offering them maximum control over their investments as they use a free debit card to pay for qualified medical expenses.

5. Fidelity

With Fidelity, HSA account holders can invest their funds into high-quality or low-quality Fidelity mutual funds and index funds, and the service carries no account minimum balance requirements or account management fees. Fidelity HSA customers also receive a free debit card to pay for qualified medical expenses.

6. Further

Further has been called the best HSA provider for employers because of the varied types of accounts it helps to manage. Small business owners can choose Further to help oversee, for example, HSAs, flexible spending accounts, transportation reimbursement accounts, dependent care assistance programs and more. It’s a one-stop shop for employers adding investment and savings accounts to their benefit programs.

7. Optum Bank

Optum Bank was placed on the HSA Report Card’s shortlist of best HSAs for spenders, or those planning on spending their funds rather than saving them long term or investing them. Optum’s HSA options feature an online receipt storage tool, and investments even can be placed on auto-pilot, requiring the least effort from the HSA account holder.

8. Elements Financial

Some HSA users will choose Elements Financial because they prefer a credit union as opposed to a corporate bank or large investment firm. Customers can set up an HSA, but they can also open a checking or savings account from the same institution. The Elements Financial HSA program features free debit cards to pay for healthcare expenses, as well as online banking and investment options.

How to Set Up an HSA for Your Small Business

Setting up a health savings account is a simple and straightforward process, but it’s important to follow the proper steps to comply with the Internal Revenue Service, much like other tax-favored health plans. Ready to start the processing of setting up an HSA? Just follow the following steps:

  1. Determine plan eligibility – Be sure you choose an HSA-eligible health plan. Remember, small businesses with fewer than 50 employees are not required to offer health insurance, but they can still offer an HSA-eligible option.
  2. Decide on contributions – Will the business contribute to employees’ HSA plans, and how much will each participant contribute to their own health savings account? Employers can contribute any amount between $0 and the plan’s contribution maximum, and the contributions carry tax savings. Likewise, any contributions made by an employee are not subject to payroll tax.
  3. Create a Section 125 cafeteria plan – By establishing a section 125 cafeteria plan, both employers and employees can contribute tax-free dollars toward their HSAs. This type of plan is available to employees, their spouses, and dependents, and it can be created by a business or a payroll service.
  4. Manage contributions and tax documentation – The easiest way to manage HSA contributions and all the proper tax documentation is to employ the services of an HSA administrator, often available through the financial institution managing the health savings account.
  5. Encourage employees to open an HSA – HSA accounts are owned entirely by the employee, and their participation is vital to offering the option as a small business. Make sure employees fully understand the tax benefits of establishing the HSA. Be sure and explain the basics of how an HSA works and how to use one, as well as what expenses are covered.

What is the best HSA?

The best overall provider of health savings accounts is HealthEquity. Not only can account holders invest in Vanguard funds with low expense ratios, but the provider offers an easy-to-use mobile app, a debit card for out-of-pocket expenses, and no account management fees. Since HealthEquity offers no investment threshold, every dollar added to an HSA is invested from the start.

What are the disadvantages of HSA?

Despite all its benefits, there are still some disadvantages of an HSA. Before establishing a health saving account for your small business, consider the following drawbacks:

  • HSA requires an HDHP for an insurance company – A High-Deductible Health Plan is required to qualify for an HSA, which can result in a greater financial burden than other types of health insurance.
  • HSAs can pressure account holders to save – Some people might be more reluctant to seek healthcare when they need it because they don’t want to spend the money in their HSA account, instead of saving it for retirement.
  • HSAs can result in tax penalties – If not used properly, an HSA could result in a tax penalty. If funds are withdrawn for a non-covered expense before the age of 65, the money becomes subject to income tax and penalties.
  • HSAs require recordkeeping – Some people might be reluctant to participate in an HSA because of the need to keep receipts that prove withdrawals were for qualified medical expenses.

Is HSA worth it for self-employed?

A health savings account can be a good option for self-employed individuals in the United States. While many health insurance premiums might be too expensive for entrepreneurs and small businesses, high deductible health plans with a health savings account can be a more affordable option that still helps fund healthcare expenses and reduce taxable income since the money is paid before income tax is subtracted. An HSA can also serve a dual purpose, as unused funds can be saved for retirement.


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Samantha Lile Samantha Lile is a staff writer for Small Business Trends and has been a member of the team for 3 years. She is also a freelance writer and journalist who contributes to a variety of web publications from her home office in the heart of the Ozarks.