Insurance Guide: Health Savings Accounts (HSA) for the Self-Employed

For the self-employed, healthcare is a paradox: when you’re paying for insurance out of pocket, even basic coverage can sometimes cost you an arm and a leg; on the other hand, if you stupidly forgo insurance, then you run the risk of actually losing an arm and a leg.

The good news is that, if you’re self-employed, there are several ways to ease the strain of healthcare costs. The first and best plan is to shop around.

Beyond that, you may also want to consider setting up a Health Savings Account (HSA). HSAs are tax-advantaged medical savings accounts available to individuals enrolled in low-premium, high-deductible insurance plans. An HSA allows you to contribute pre-tax income to an account earmarked by the government for out-of-pocket healthcare contributions.

Exempt Interest and Earnings

In addition to not paying tax on your contributions to an HSA, any interest or earnings that accumulate in the account are also exempt, and unlike a Flexible Spending Account (another common tax-advantaged account), HSA funds accumulate year to year if they are not spent. 

Furthermore, provided that you use the money for health-related expenses such as premiums and direct care, you pay no taxes at the time of withdrawal. In other words: an HSA is a kind of targeted tax shelter. By making regular contributions, eligible solopreneurs can slash their tax bill and protect their physical well-being.

A self-employed individual, entrepreneur, or freelancer — meaning a contributor whose plan covers only one person — can invest up to $3,850 per year, as of 2023. This means that a motivated solopreneur in good health can amass a large sum of money in a fairly short amount of time.

And the funds in an HSA can be managed in much the same way as the money in an IRA — you can establish the account through a bank, an insurance company, or a brokerage firm — although typically contributions are invested in relatively stable mutual funds. After all, the point isn’t to get rich; it’s to have a strong net ready in the event that you take a tumble.

Okay, so what’s the catch?

First things first: Not everyone is eligible for an HSA. In order to qualify, you must be enrolled in a low-premium, high-deductible insurance plan. For an individual, the minimum qualifying deductible is $1,400; for a family plan, $2,800. And remember that contribution cap? Well, your personal annual contribution is tied directly to your plan’s deductible.

If your deductible is only $1,500, then that represents your maximum yearly investment. Also, having a Health Savings Account alone is considered a break in coverage. Should you allow your primary care plan to lapse, you are at risk of being denied coverage for a pre-existing condition in the future.

Like any form of insurance, the purpose of an HSA is to protect you from excessive risk. There is, of course, no way to know if you will ever need a large sum of money for medical expenses, but one thing is for sure: your health is the most precious asset that you have. Without it, you can’t run your business and you can’t earn income.