10/19/2026
What Entrepreneurs Should Know About The Tax Benefits Of HSAs
Health Savings Accounts or HSAs are tax-favored savings accounts paired with high-deductible health insurance They're available to employees through workplace plans and to many individual buyers using Obamacare coverage.
By law, the insurance portion has to meet certain standards, such as annual out-of-pocket maximums and minimum deductibles. The overall aim is to protect users from expensive health costs while encouraging them to spend out-of-pocket health dollars wisely.
Deductibles for the insurance coverage vary. For 2027, they begin at $1,750 for individuals and $3,500 for families. The max out-of-pocket limit is $8,700 for individuals and $17,400 for a family.
To ease the sting of the deductible, users also qualify for an HSA. Either the user, the employer, or both, can make tax-deductible contributions to these accounts. The 2027 limit is $4,500 for individuals and $9,000 for a family. “Catch-up” contributions of up to $1,000 annually are available if the owner is age 55 or older.
The tax benefits of these accounts are as follows...
1 - Dollars go into the accounts tax-free.
2 - They will then grow tax-free.
3 - And if they're withdrawn for unreimbursed, qualified medical expenses, they're also tax-free.
That’s a tax trifecta. It’s a rare opportunity for those who can pay current medical expenses out of pocket to let invested HSA dollars grow.
Let me leave you with this...
To receive reimbursements from an HSA, users must have proof of qualified medical expenses. But they don’t have to submit it to the account sponsor for approval. Reimbursements can be subject to audits by the IRS, but these examinations seem to be rare.
HSA owners who delay reimbursements to let HSA assets grow can claim these paybacks later. But they must have records supporting the claims.
At age 65, the account owner is free to make HSA withdrawals for any reason. However, these payouts are taxable as ordinary income similar to the rules of a regular IRA, so using the account for tax-free health reimbursements is better if possible.
Also at age 65, HSA owners can usually enroll in Medicare. But those who do can no longer contribute to an HSA, even if they’re still working and enrolled in HSA-compatible health insurance.
However, HSA owners on Medicare can use tax-free withdrawals from their accounts to pay Medicare premiums and copayments.
At death, a spouse is the only person who can inherit an HSA tax-free, provided the owner names him or her as the beneficiary. A charity can also inherit the account if named as a beneficiary.
If there’s money in the HSA owner’s account at death, the account terminates and income taxes are due. Nonspouse heirs have one year to claim tax-free reimbursements for eligible out-of-pocket expenses incurred up to the date of death, which reduces taxes.
HSA owners can invest account funds prior to withdrawing them, and nearly five million accounts do so. The average account size for HSA owners who invest their funds was nearly $24,000 recently, according to Devenir.
As we go into the next tax season, preparation is crucial. Setting up an HSA can provide long term tax benefits that aren't available elsewhere.
If you have questions, don't hesitate to contact us. And if you're having problems with your accounting and tax work, I'm waiting for your call.
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