If you’re self-employed or a small business owner, you know that work means more than just nine to five. And you also know you face a unique set of challenges—including making the best decisions for your business when it comes to healthcare and financial wellness. If you’re self-employed or a small business owner looking for your HSA options—you’ve come to the right place. You’ll learn if you can even have an HSA, if business owners can contribute to an HSA and even step-by-step instructions on how to set up an HSA for your small business.
Can I have an HSA if I'm self-employed?
The short answer is yes. But there’s a little more to it than that.
At its core, a self-employed HSA option is very similar to options for employers. Since an HSA isn’t a type of insurance, it comes down to you as a self-employed individual needing to have an HSA-compatible health plan. According to HSA rules set by the IRS, you can only open an HSA if you’re covered by an HSA-eligible high-deductible health plan (HDHP). Learn more about HDHPs and other HSA basics.
So if you’re a self-employed individual covered under a qualified plan, you may open and contribute to an HSA.
You’re not eligible for a self-employed HSA if you’re covered by your spouse’s health insurance plan that isn’t a qualified HDHP. You’re also not eligible for a self-employed HSA option if you’re claimed as a dependent on another person’s tax return or if you’re enrolled in Medicare or Medicaid.
Assuming you’re already enrolled in an HSA-qualified HDHP, a self-employed HSA can be not only a crucial path to tax savings on your healthcare expenses, but also an integral part of a bigger picture financial wellness program and retirement plan. Because the reality is—self-employed individuals and small business owners most often don’t save as much for retirement compared to those who are traditionally employed. Leveraging an HSA can help you save big on qualified medical expenses while doing double-duty as a retirement account for you.
If you set up an HSA and contribute to it as a sole proprietor, you’ll be able to deduct some of your contributions on your personal income tax return. As long as you make a profit during the tax year, you can file the deduction. For 2019, the maximum HSA deduction is $3,500 if you’re participating in a qualified HDHP as single and $7,000 if you’re participating as a family. If you’re 55 or older, you can tack on an extra $1,000 to either amount. However, you can’t contribute more to your HSA than your net self-employment income.
While many who are traditionally employed can contribute to their HSA on a pretax basis, as a self-employed individual, you can make HSA contributions with after-tax dollars and then do a line item deduction on your Schedule C. It’s a little more paperwork, but still an easy way to save money on qualified medical expenses.
If you have an LLC, the basic principles of your self-employed HSA aren’t much different than those of a sole proprietor. But if you have employees, there are additional considerations. Learn more about how an LLC can have an HSA.
Can S Corp or C Corp business owners contribute to an HSA?
There are special rules applied by the IRS to specific business entities dependent on ownership of the business—whether owned by individuals or investors. Due to these rules, certain business entities face restrictions on HSA funding.
If you’re a 2% or greater owner of an S Corp, you’ll be affected by HSA funding restrictions. When it comes to employer contributions to an S Corp HSA, the business can’t provide owners with a tax-free contribution. Any contributions from the S Corp business to the owners’ HSAs are considered taxable income—you can’t make pretax contributions to your HSA. But while the S Corp HSA contributions are taxable to the owners, they’re also tax deductible to the business as a compensation expense. And even after-tax HSA contributions still provide a valuable tax advantage on qualified medical
On the employee side, or if you’re less than a 2% owner of an S Corp, the restrictions don’t apply—meaning an S Corp business can make tax-free contributions to their employees’ HSAs as long as they’re consistent with the current IRS regulations on employer contributions.
For C Corp business owners, since the business is considered a completely separate legal entity, the IRS views owners the same as employees. If you’re a C Corp business owner, you’re eligible for your company’s HSA, including making pretax contributions to your HSA account. Just remember, all contributions must comply with current IRS regulations on employer HSA contributions.
If you’re a single member LLC and you have an HSA-eligible high-deductible health plan (HDHP), the way your HSA will operate is essentially the same as a self-employed sole proprietor. While you won’t be able to contribute to your HSA on a pretax basis, you will be able to make HSA contributions with after-tax dollars and then do a line item deduction on your Schedule C. Bottom line—having an HSA even as a single member LLC still saves you money on your healthcare expenses.
However, if you’re an LLC with employees, you may have the option to implement an HSA for your LLC that will allow your employees to make pretax contributions. This type of LLC HSA is commonly known as a cafeteria or 125 plan. Remember, as the LLC business owner, you can’t participate directly, but offering this type of HSA cafeteria plan for your employees brings many benefits.
A cafeteria plan is an employee benefits plan administered under Section 125 of the federal tax code (hence why the plan is sometimes also referred to as a 125 plan). This type of plan allows your employees to pay certain expenses with pretax income, and to choose the benefits they want (just like in an actual cafeteria!). If you choose to set up this type of plan, funding an HSA can be an option under your cafeteria plan.
Just as with you as the LLC owner, your employees must participate in a qualified HDHP to be eligible for a tax-exempt HSA. Your employees who meet eligibility requirements for an HSA can then set aside a portion of their pretax income to pay for qualified medical expenses. You as the LLC owner can also contribute to your employees’ HSAs up to maximum annual limit set by the IRS.
Another benefit is that the HSA is a portable account—meaning your employees can keep it open even if they change jobs. On top of that, the pretax deductions may help your employees qualify for other income-based tax credits, and their HSA contributions can even be invested and turned into income-producing assets.
And there’s also added benefits for you as the LLC owner. If you decide to contribute to your employees’ HSAs under your cafeteria plan, your contributions will be tax deductible as a business expense. This means those HSA contributions aren’t counted as employee income and they’re not subject to payroll tax like FICA. These favorable tax treatments, along with your ability as an owner to still make after-tax contributions to your own HSA, makes offering a cafeteria plan a smart strategy for increasing your employees’ total compensation while staying focused on your LLC’s bottom line. It also saves the LLC money by lowering FICA taxes the employer pays as the employee’s taxable income is lower.
How do I set up an HSA for small business?
Setting up an HSA for small business owners who don’t have employees is a fairly simple, straightforward process. Whether you’re self-employed, a single member LLC or otherwise, as you already know if you read any of the sections above, the first step to setting up an HSA for small business owners is ensuring you’re eligible to open an HSA by enrolling in an HSA-eligible high-deductible health plan (HDHP). It’s important to note, not all HDHPs are HSA-eligible, so be sure you double-check your specific plan before moving forward.
Once you’ve confirmed that your HDHP is HSA-eligible, you’re ready to open your small business owner HSA account. You can open your HSA a variety of ways—through your bank, another financial institution or even conveniently online from a leading-edge, FDIC-insured HSA provider like Bend HSA. Depending on how you open your HSA, you may receive a debit card to use directly for eligible healthcare expenses. Keep in mind, if you’re opening an HSA on your own as a small business owner with no employees, your choice is an important one, because no two HSA administrators are created equal. Fees, investment options and many other variables can impact both your short and long-term HSA financial health. So do your homework, and make the right choice.
If your small business has employees and you decide you’d like to offer an HSA option for your employees, setting up an HSA requires a few more steps.
The initial step is the same as for small business owners who don’t have employees—you and your employees need to be enrolled in an HSA-eligible HDHP. From there, if you want to allow your employees to make pretax contributions to their HSAs, you need to set up and maintain a Section 125 cafeteria plan that offers HSA deferrals. As part of maintaining your cafeteria plan, you’ll be responsible for collecting your employees’ deferral elections and sending those contributions directly to your HSA custodian (we’ll cover who your HSA custodian is in just a bit). As the employer, you’re also responsible for ensuring your HSA-eligible employees don’t exceed their maximum contribution limits, since over contributing and other issues only lead to more work for you. Then, at the end of each year, you’ll need to provide the appropriate tax documents associated with your plan—that means a W-2 for your employees and an IRS Section 106 to allow your small business to deduct the benefits.
In tandem with setting up your small business’ cafeteria plan, you’ll also need to choose your HSA custodian—essentially, the administrator of your HSA account. An HSA custodian can be any bank, credit union, insurance company, brokerage or other IRS-approved financial institution that offers HSAs. Your HSA custodian holds your HSA assets in a secure HSA account and plays a vital role in all aspects of HSA administration.
Your choice of an HSA custodian is a critical one for your small business. Who you choose sets the tone for not only interest earned, fees paid and investment options available, but also for ease of use by your employees and ease of your own HSA program management as the small business owner. out what sets Bend HSA apart from the HSA custodian competition.
Once you’ve worked your way through all of the steps above, you’re on your way to better managing your healthcare expenses through a tax-advantaged HSA program for your small business.