A health savings account is one of the few places in the tax code where money can go in deductible, grow untaxed, and come out tax-free. For business owners, though, the rules depend on how your business is structured, and most people use only a fraction of what the account can do. Here's how to set it up correctly and use it for the long run.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
Who Qualifies: HDHPs and the 2026 Expansion
To contribute, you generally need to be covered by a high-deductible health plan (HDHP) and have no other disqualifying coverage. For 2026, an HDHP must carry a deductible of at least $1,700 for self-only coverage or $3,400 for family coverage, with out-of-pocket costs capped at $8,500 and $17,000, respectively (Rev. Proc. 2025-19).
The One, Big, Beautiful Bill Act widened the door starting January 1, 2026. Bronze and catastrophic plans are now treated as HSA-compatible even if they don't meet the usual HDHP definition, and IRS Notice 2026-5 confirms an individual-market bronze or catastrophic plan bought off-Exchange qualifies if the same plan is offered on an Exchange. Certain direct primary care arrangements no longer disqualify you either, provided the monthly fees don't exceed $150 for one person or $300 for coverage of more than one person — and you can pay those fees from your HSA tax-free. The law also made permanent the ability to receive telehealth before meeting your deductible without losing eligibility.
2026 Contribution Limits
For 2026, you can contribute up to $4,400 with self-only coverage or $8,750 with family coverage. If you're 55 or older by year-end, add a $1,000 catch-up contribution. You have until the tax filing deadline (typically April 15 of the following year) to make contributions for a given year, which gives you time to fund the account once you know your numbers.
One hard stop: beginning with the first month you're enrolled in Medicare, your contribution limit drops to zero. If you plan to keep working past 65, coordinate your Medicare enrollment with your HSA funding.
How Your Entity Type Changes the Deduction
Sole proprietors and single-member LLCs. Your HSA contribution is deducted on your Form 1040 as an adjustment to income, reported through Form 8889 — not as a business expense on Schedule C. That means it lowers your income tax but doesn't reduce the income your self-employment tax is calculated on.
Partners and LLC members taxed as partnerships. If the partnership contributes for you in exchange for services, the IRS treats it as a guaranteed payment: deductible by the partnership and included in your income. You then claim the HSA deduction on your personal return.
S corporation owners (more than 2%). Under IRS Notice 2005-8, company contributions to your HSA are included in your W-2 wages for income tax purposes, but they are not subject to Social Security and Medicare taxes when the applicable requirements are met. You then deduct the contribution on Form 8889. Run through payroll, this is generally better than contributing personally, because you avoid the FICA cost on those dollars. The key is getting the payroll coding right so the amount lands in the correct W-2 boxes.
Whatever your structure, anyone with HSA activity during the year must file Form 8889 with their return.
Moving Your HSA to a Better Provider
Many owners open an HSA wherever their insurer or bank pointed them, then discover high fees or limited investment options. You can move it, but the method matters.
A trustee-to-trustee transfer, where the old custodian sends funds directly to the new one, isn't treated as a rollover, and there's no limit on how many you can do. A rollover, where you receive the money yourself, must be redeposited within 60 days, and you're limited to one rollover in any 12-month period. Miss the deadline and the distribution can become taxable, plus a potential penalty. Direct transfers are almost always the cleaner path.
Invest the Balance and Save Your Receipts
Earnings inside an HSA aren't taxed while they stay in the account, so if your cash flow allows, consider paying current medical bills out of pocket and investing the HSA balance for long-term growth. Keep a reasonable cash cushion in the account for unexpected costs.
Here's the part many people miss: you can reimburse yourself tax-free for qualified medical expenses incurred after the HSA was established, and there's no deadline for doing so. A receipt from this year can be reimbursed a decade from now. The catch is documentation — you need records showing the expense was qualified, wasn't reimbursed from another source, and wasn't claimed as an itemized deduction. A dedicated digital folder of receipts and explanation-of-benefits statements is worth setting up now.
What Changes at 65
Before 65, HSA withdrawals not used for qualified medical expenses are taxable and hit with an additional 20% tax. After 65 (or upon disability), that 20% additional tax no longer applies. Non-medical withdrawals are still taxed as ordinary income, but withdrawals for qualified expenses remain tax-free. That includes Medicare premiums — though not Medicare supplemental (Medigap) premiums. In practice, an HSA becomes a flexible retirement account that is especially efficient for health costs.
How VarStan Helps
The best HSA strategy depends on your entity, payroll setup, and long-term plans. VarStan's CPA-led team can confirm your plan's HSA eligibility, structure S corporation contributions correctly through payroll, coordinate Form 8889 with the rest of your return, and fold your HSA into a broader tax and retirement plan. If you'd like a second set of eyes on your setup before year-end, we're happy to talk.
Related reading: The Home Office Deduction: Who Qualifies and How to Claim It and How Much of Your Social Security Is Taxable — and How IRA Withdrawals Change It.