Navigating the Numbers

For owners of S-Corporations understanding how to contribute to a Health Savings Account (HSA) can lead to significant tax advantages and healthcare savings. This post explores the rules and benefits of HSA contributions for S-Corporation shareholders.

HSAs are tax-advantaged savings accounts designed for individuals and families with high-deductible health plans (HDHPs). To qualify as an HDHP the plan must have a minimum deductible and max out of pocket to qualify. For 2023, the minimum deductible for self-only is $1,500 while the minimum for family coverage is $3,000. The maximum out-of-pocket expenses for self-only is $7,500 and family coverage is $15,000. If eligible you can make pre-tax contributions, earn tax-free growth, and make tax-free withdrawals for qualified medical expenses. It is important to note that to qualify for an HSA the coverage must be health insurance, cost sharing plans are not considered health insurance and are typically not HSA eligible.

HSA Contributions for >2% S-Corporation Shareholders:

1. Contribution Process:
   • Typically, individual employees contribute to their HSAs through pre-tax payroll deductions. However, >2% shareholders cannot make pre-tax HSA contributions through the S-Corporation.
   • Instead, they must make contributions directly to the HSA provider.
2. Tax Implications:
   • If the contributions are made by the business the >2% shareholders contributions are not excluded from taxable income on their W-2 forms like other employees. They must report these contributions as gross income.
   • However, they can deduct the contribution amount on their personal income tax return, effectively receiving similar tax benefits to other taxpayers.
3. Contribution Limits:
   • The annual HSA contribution limits apply to >2% shareholders as they do for other eligible individuals. For 2023, self-only HDHP owners can contribute up to $3,850. If you have family HDHP coverage, you can contribute up to $7,750. A “catch up” of $1,000 if you are 55 or older. There are different limits if you were not covered the entire year by an HDHP plan.

Benefits of HSA Contributions:

• Tax Savings: Contributions reduce personal taxable income, offering significant tax benefits.
• Healthcare Planning: Funds can be used tax-free for qualified medical expenses, aiding in long-term healthcare planning.
• Investment Growth: HSAs can grow through investment, similar to retirement accounts, and the funds roll over year to year.

While >2% shareholders of S-Corporations face unique rules for HSA contributions, understanding these nuances can unlock valuable tax savings and healthcare benefits. Careful planning and compliance with IRS guidelines are key to maximizing the advantages of an HSA.

If you’re an S-Corporation owner looking to optimize your HSA contributions, we would love to connect.

The tax information provided here is for informational purposes only and should not be construed as or relied upon for tax or legal advice. This information is based on the laws and regulations in effect at the time of issuance, and we do not undertake any obligation to update this information after the date of its release. Please speak with your tax professional or attorney for guidance specific to your circumstances.