To remain competitive in today’s job market, almost half of all U.S. employers provide workers with health insurance. With many others worrying about shouldering the expense of offering health insurance, an increasingly popular and affordable option is attracting small businesses and their owners: Health Savings Accounts, or HSAs.

Since their inception in 2004, tax-advantaged HSAs have grown into a successful multi-faceted tool for employers as well as for shooting sports equipment retailers seeking self-only healthcare plans. Used in combination with a high-deductible health plan (HDHP), HSAs offer a free-market option that does not rely on mandates or cash subsidies.

Businesses with 50 or more full-time employees are required to provide health insurance to their workers or face penalties. Small firearms or archery businesses that don’t fall within this definition aren’t subject to the employer mandate and, thus, are not required to offer health insurance coverage to their workers — but should they?

HSAs for Fun and Profit

The concept of HSAs is both simple and elegant: Give individuals generous tax breaks to put aside money to help pay for their healthcare. In theory, the combination of HSAs and high-deductible insurance would encourage reduced medical spending. That, in turn, would make it easier for employers to offer employees lower-cost, high-deductible health plans.

The high-deductible plan puts more of the burden on consumers, rather than insurance companies, to pay those first-dollar costs. And, much like an IRA, HSAs provide three tax breaks:

• Contributions can be made with pre-tax funds and reduce taxable income.
• Investment income earned on HSA accounts is tax-free.
• Withdrawals are also tax-free as long as they are used for qualified health-related expenses.

After age 65, participants can choose to treat an HSA as a retirement account. Generally, if HSA funds are withdrawn for other than qualified medical expenses before the participant turns 65, income tax plus a 20% penalty must be paid. However, after the participant turns 65, that 20% penalty no longer applies, and withdrawals are treated as ordinary income.

Funds in an HSA can be used to pay deductibles and other qualified healthcare expenses (including dental, vision or other health-related services not covered by insurance). In fact, thanks to recent changes in the law, employees with high deductible plans no longer have to pay off their deductible before insurance will cover chronic disease medications.

Money remaining in HSA savings can be invested just as with a 401(k) plan. Best of all, the tax-advantaged money in the HSA plan can grow, year after year, even if workers change jobs.

Obviously, HSAs can be a good deal for participants — both workers and employers. And, HSAs also provide a health insurance option for the self-employed or small business owner who may be reluctant, or unable to afford, healthcare coverage other than for themselves.

Yes, There Are Limits

Any eligible individual can contribute to an HSA. For an employee’s HSA, the employee, the employee’s employer or both may contribute to the HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual contributes. Family members or others may also make contributions on behalf of an eligible individual.

Participants in HSA plans can’t contribute more than they earned for the year from the employer sponsoring the HDHP. A self-employed firearms dealer or other individual can’t contribute more than the amount of their net self-employment income.

HSA participants, or “owners,” must have a health insurance policy with a deductible of at least $1,400 for single coverage or $2,800 for family coverage. HSA contributions of up to $3,550 are permitted during 2020. Those with family coverage can contribute up to $7,100.

For those 55 years and older, the annual HSA “catch-up” contribution remains level at $1,000 because it wasn’t indexed for inflation. With a catch-up contribution, those with self-only coverage can contribute up to $4,550, while those with family coverage can contribute a maximum of $8,100.

Small Business Healthcare Tax Credit

An option that should not be ignored is the small business healthcare tax credit (SBHCTC) that a shooting sports equipment business with 25 or fewer employees can use to reduce its tax bill by 50% of the amount paid for health insurance premiums. This credit, a direct reduction of the operation’s tax bill rather than a reduction in the amount that tax bill is based on, is available to eligible employers for two consecutive tax years.

The SBHCTC is a sliding-scale credit that is based on the employer’s size. The larger the employer, the smaller the tax credit and vice versa. If the business does not have a tax bill this year, the credit can be carried back or forward to other tax years.

Best of all, the amount of health insurance premiums paid in excess of the allowable credit can be deducted as a business expense. Plus, the tax credit can be used to defray the cost of premiums, making the purchase of small business health insurance more affordable.

The SBHCTC is a sliding-scale credit that is based on the employer’s size. The larger the employer, the smaller the tax credit and vice versa. If the business does not have a tax bill this year, the credit can be carried back or forward to other tax years.

Best of all, the amount of health insurance premiums paid in excess of the allowable credit can be deducted as a business expense. Plus, the tax credit can be used to defray the cost of premiums, making the purchase of small business health insurance more affordable.

What's Covered

Thanks to recent rule changes, high-deductible healthcare plan participants no longer need to worry about paying for testing and treating the coronavirus if they haven’t reached their deductible. The plans can cover the costs without losing their status as a high-deductible plan.

HSA plans can now also be used to temporarily cover telehealth and other remote-care services before the deductible. Over-the-counter drugs and medicine can now be purchased using an HSA without a prescription, as can feminine hygiene products.

Anyone who finds him- or herself anxious or depressed can use the HSA for a therapist, as well as drug and alcohol dependency programs. HSAs can also be used for alternative treatments for stress and anxiety often including acupuncture or massage.

Special Rules for S Corporations

More than 2% shareholders in an S corporation are treated as “self-employed” rather than “employees” and, thus, cannot participate in a cafeteria plan. S corporation shareholder/owners can, however, have an HSA, but to be eligible, individuals must:

* Have qualifying HDHP coverage,

* Not have impermissible non-HDHP coverage

* Not be entitled to Medicare, and

* Not be a dependent on another’s tax return.

Any individual who meets these criteria is eligible to make HSA contributions or to have contributions made on his or her behalf.

Drawbacks

The main drawback for most HSA participants is that they are responsible for all (non-preventable) healthcare costs until the high deductible is reached. While the pre-tax funds put into the HSA can be used to pay those medical bills, because of the contribution limits, there may not be sufficient funds to cover all out-of-pocket costs.

Another drawback (albeit minor) that everyone should be aware of is that there can be fees for an HSA. This could include fees to set it up, to put money into it and, perhaps, even a fee to take money out of it.

Sign Me Up

Enrollment in HSAs has increased year after year, and account balances have grown from an estimated $6 billion to over $55 billion. As a result, those with high-deductible plans and low HSA balances may use less health care services, for better or worse. For those who can put aside enough to generate high balances, HSAs provide a nice tax-free savings vehicle.

For those who may have already maxed out their 401(k) and IRA contributions, an HSA is yet another place to save cash in a tax-advantaged way. But, whether an employee, the owner of a shooting sports equipment business or self-employed, the time to think about HSAs, the contribution limits and the many benefits they offer, is toward the end of the year.

Eligible employees must decide how much to contribute through payroll deductions. Throughout the year, employees can then use these funds to pay qualified medical expenses, including co-pays, deductibles and a variety of medical products and services ranging from dental and eyecare, eyeglasses and hearing aids. It is a similar story for small tactical equipment business owners and the self-employed, the “owners” of their own HSA plans.

While they may fall short on the promised medical cost reductions, health savings accounts are an excellent tax-free investment account. That’s because the money going into the account is shielded from taxes, both as it grows and when the amounts are withdrawn — so long as it is used to pay for medical expenses.

A savvy HSA participant could accumulate up to $360,000 after contributing for 40 years to an account with a rate of return of only 2.5%, according to the Employee Benefit Research Institute. Naturally, growth at this or any other rate is only possible if the HSA account is not being used for healthcare expenses prior to retirement. Little wonder that HSAs are considered a good tax shelter.

HSAs are an increasingly popular choice for tactical retailers seeking to manage the rising cost of health insurance for workers — and themselves. Because HSAs offer triple tax advantages, more and more are predicted to participate in the future. As always, advice from a tax professional and/or plan administrator, usually a bank, financial institution or insurance company, is obviously a necessity.  

Editor’s Note: This article was written in September 2020, prior to the election. Because the healthcare situation has the potential to change rapidly and dramatically based on how the political winds blow, you should pay attention to any changes and consult a professional if you have questions.