How Health Savings Accounts work

What is a Health Savings Account and how does it work?

An HSA is a tax-advantaged savings account tied to a High-Deductible Health Plan (HDHP) that lets you set aside money for qualified medical expenses — completely tax-free at every stage: contribution, growth, and withdrawal. The IRS defines the rules in Publication 969, and the triple-tax benefit makes HSAs one of the most powerful savings vehicles available to small-business owners who qualify.

Here's how the three tax advantages stack up:

• Contributions are pre-tax — they reduce your taxable income in the year you make them.

• Growth is tax-free — interest and investment gains inside the account are never taxed.

• Withdrawals are tax-free — as long as you use the money for qualified medical expenses defined under IRC §213(d).

Unused balances roll over every year with no "use-it-or-lose-it" penalty. After age 65, you can withdraw funds for any reason (not just medical) and pay only ordinary income tax — essentially treating the HSA like a traditional IRA.

Who is eligible to contribute to an HSA?

To contribute to an HSA, you must be enrolled in an HSA-eligible High-Deductible Health Plan and meet four IRS criteria: you can't be covered by any non-HDHP health plan, you can't be enrolled in Medicare, you can't be claimed as a dependent on someone else's return, and you can't have received VA health benefits for a non-service-connected condition in the past three months.

For 2026, the IRS defines an HDHP as a plan with a minimum deductible of $1,700 for self-only coverage or $3,400 for family coverage, and out-of-pocket maximums of $8,500 (self-only) or $17,000 (family). Check your health plan documents or ask your insurer to confirm your plan qualifies — not every high-deductible plan is technically HSA-eligible.

What are the HSA contribution limits for 2026?

For 2026, the HSA contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. If you're 55 or older, you can contribute an additional $1,000 catch-up contribution on top of those amounts. These limits apply to the combined total of employee and employer contributions.

A few practical notes for small-business owners:

• You can contribute the full annual limit even if you enroll mid-year, as long as you remain HSA-eligible through December 31 of the following year (the "last-month rule").

• Contributions can be made up to the tax-filing deadline — typically April 15 — for the prior tax year, giving you extra planning flexibility.

• Contribution limits are adjusted for inflation annually; confirm the current year's figures at irs.gov/publications/p969.

How do HSAs work for small-business owners and the self-employed?

For sole proprietors and self-employed individuals, HSA contributions are deducted on Schedule 1 of Form 1040 as an above-the-line deduction — meaning you don't need to itemize to capture the benefit. This directly reduces your adjusted gross income (AGI), which can also lower your self-employment tax exposure. Talk to your CPA at Warrior about how stacking an HSA with a comprehensive tax plan affects your overall AGI and estimated quarterly payments.

If you operate as an S-corporation, the rules are slightly different and worth understanding carefully:

• If you own more than 2% of an S-corp, you cannot receive employer HSA contributions tax-free the same way a regular W-2 employee can.

• However, the S-corp can still pay your HSA contributions — they're included in your W-2 wages, and you then deduct them as a self-employed health insurance deduction on your personal return.

• This means you still get the income-tax deduction, but you don't escape payroll taxes on the contribution the way a non-owner employee would.

S-corp treatment of HSAs is a frequent source of errors on tax returns. If you're a shareholder-employee, this is worth reviewing with Warrior's team — see our S-corp tax services page for more on how we handle these situations.

Can an employer contribute to employees' HSAs, and is that deductible?

Yes — employer contributions to employee HSAs are deductible as a business expense and are excluded from the employee's gross income, making them one of the most tax-efficient benefits a small business can offer. Employer contributions don't count as wages, so neither the employer nor the employee pays payroll taxes on them.

Important rules for employers contributing to employee HSAs:

• Comparability rules — If you contribute to employee HSAs outside of a Section 125 cafeteria plan, contributions must be "comparable" — the same dollar amount or same percentage of the deductible — for all employees in the same category (self-only or family). Violating this rule triggers a 35% excise tax.

• Cafeteria plan exception — If you fund HSAs through a Section 125 plan, the comparability rules don't apply, and employees can make pre-tax salary deferrals. This is the more flexible route for most small businesses with multiple employees.

• Owner-employees who hold more than 2% of an S-corp are excluded from cafeteria plan benefits, which is why the rules above for S-corp owners differ from regular employees.

What expenses can HSA funds be used for?

HSA funds can be used tax-free for any "qualified medical expense" as defined under IRC §213(d) — a broad category that includes far more than just doctor visits and prescriptions. Common qualified expenses include dental and vision care, mental health services, chiropractic treatment, prescription drugs, and — following the CARES Act — over-the-counter medications and menstrual care products without a prescription.

Expenses that are not qualified include cosmetic procedures (unless medically necessary), gym memberships (in most cases), and most insurance premiums — with specific exceptions such as COBRA premiums, long-term care insurance premiums (subject to age-based limits), and health insurance premiums paid while receiving unemployment compensation.

Keep your receipts. There's no deadline for reimbursing yourself from an HSA for a past expense, so some business owners pay medical costs out-of-pocket, invest the HSA funds for growth, and reimburse themselves years later — a legitimate and increasingly popular strategy.

How should Fort Wayne small-business owners get started with an HSA?

Getting started involves three steps: confirm your health plan is HSA-eligible, open an HSA with a qualified trustee (a bank, credit union, or approved insurer), and begin contributing. The HSA trustee is responsible for reporting contributions and distributions on Form 5498-SA and Form 1099-SA respectively, and you'll report your own contributions and deduction on Form 8889 filed with your tax return.

If you're a business owner in the Fort Wayne area weighing whether an HSA makes sense alongside other retirement or benefits strategies, or if you want to make sure your S-corp is handling HSA contributions correctly on your W-2, the right starting point is a conversation with your CPA. Our business tax preparation process includes a review of owner-employee benefits to catch exactly these kinds of issues before they become problems at filing time.

Sources

1. Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans. Internal Revenue Service. 2024. https://www.irs.gov/publications/p969

2. Internal Revenue Code §213(d) — Medical, Dental, Etc., Expenses. U.S. Congress. https://www.law.cornell.edu/uscode/text/26/213

3. Health Savings Accounts and High-Deductible Health Plans: CRS Report R45277. Congressional Research Service. 2025. https://www.congress.gov/crs-product/R45277

4. Notice 2005-8: HSAs — Application to S Corporation Shareholders. Internal Revenue Service. 2005. https://www.irs.gov/irb/2005-04_IRB#NOT-2005-8

5. IRC §4980G — Failure of Employer to Make Comparable HSA Contributions. U.S. Congress. https://www.law.cornell.edu/uscode/text/26/4980G

6. CARES Act Section 3702 — Over-the-Counter Medical Products. U.S. Congress. 2020. https://www.congress.gov/bill/116th-congress/house-bill/748/text