The Health Savings Account (HSA) is a valuable financial planning tool that helps cover medical expenses for you and your family. Short of taxes and retirement, medical expenses are one of the highest expenses that Americans have to deal with. When one can properly utilize the HSA effectively, it is possible to pay for thousands of medical expenses over the years, completely tax-free. Given the right situation, an HSA can be a great addition to a financial plan to help reduce the burden of medical expenses.
What Is an HSA?
An HSA is a savings/investment account that allows you to contribute pre-tax dollars to help pay for future medical expenses down the road. Similar to a 529 account for college planning, an HSA operates as a separate account designed for a relatively specific purpose.
To get access to open an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). Congress has set rules around these plans, where currently in 2025, the deductible for your plan must be at least $1,650 or more for single coverage and $3,300 for family coverage. The out-of-pocket maximum for these plans in 2025 must also stay under specific limits, namely $8,300 for single and $16,600 for family coverage. Check with your health insurance provider if you have access to one of these plans, as they are common enough that they should provide you with a similar option that checks the boxes.
In this space of Employee Benefits, there is also a large distinction around how long the funds last. There are other accounts, commonly called FSAs or Flexible Spending Accounts, which operate similarly to an HSA, but you lose all contributions at the end of each year. For an HSA, however, once money is contributed to the account, the money will stay and grow until you take it out. In most situations, this is why the HSA is preferable because you no longer are required to scramble at the end of the year to create medical expenses before losing your money.
How Does It Work?
HSAs allow pre-tax or deductible contributions into the account each year. Similar to many other savings accounts, Congress has set limits on how much can be contributed each year. In 2025, employees with self-only coverage on their health insurance plan can contribute up to $4,300 for the year. For those on a family plan, they can contribute up to $8,550 for the year. These limits are per person per year, not per account. A typical married couple should not get to contribute more than the $8,550 total between them.
After dollars are contributed each year, they can grow tax-free until you withdraw them. This account operates very similarly to a retirement account. Many institutions that can open an HSA account will let you invest within the account freely. This is an important step to verify your contributions are being invested for long-term growth (if that is the goal). Since dollars inside the HSA are not taxed while they are there, the more growth should lead to more tax savings.
Finally, HSA dollars can be distributed for qualified medical expenses completely tax-free. For example, it is very possible to pay for a hypothetical future surgery in 10 years without any taxes incurred. It is not hard to imagine a $10,000 surgery bill and a 25% tax rate that would save you $2,500 in taxes. It is important to verify specific medical expenses with the “qualified nature” of the rules, but as a good rule of thumb, if it makes it through insurance, it may likely qualify for an HSA expense.
How to Maximize an HSA
With a basic understanding of how an HSA works now, the question we must ask is how to maximize it for the small business lifestyle. First, contributions each year are required to start building the value of the account. $8,550 each year over the next 10-15 years can create a 6-figure account if you never withdraw anything. Done so well, in fact, that many advisors recommend this exact strategy. Never withdraw anything from your HSA and turn it into another retirement account.
There are pros and cons to this approach. Fortunately, once you reach age 65, the HSA essentially turns into a traditional IRA and currently only requires income tax due on distributions. However, any distributions before 65 for non-qualified medical expenses will incur a 20% tax penalty. If you are comfortable cash-flowing healthcare expenses before retirement, you can collect the receipts from all those expenses and reimburse yourself decades later, after retirement, to take out the same distributions but once again tax-free.
Alternatively, others recommend a “use it while you can” approach. Many institutions can offer a debit card for the HSA, and people will swipe every medical purchase possible to build up the tax savings. I tend to lean somewhere between the two approaches. The longer you wait, the more tax-free growth you hope to create, but having a separate savings account to keep cash flow smooth when major medical expenses pop up can be extremely beneficial. Depending on the situation, I’d lean more to leaving the HSA alone to grow until the “budget-buster” expenses come around for you or your family, and use the HSA to cash in on the tax savings then.
One Step of Many
A health savings account is not going to make anyone rich or change the life of a family. However, as one part of a larger financial plan, an HSA can be an extremely useful tool to combat one of life’s biggest expenses. Spend the time to understand what an HSA is and how they work, and work with your healthcare provider to see if you can set one up for your business. If done correctly, it is reasonable to create a new savings account that could save you tens of thousands of dollars in taxes over your lifetime.
TC Falkner 