HSA’s for Small Business Owners

Small business owners face special rules when making HSA contributions for themselves as compared to their employees.

HSA Contributions Guide for Small Business Owners – This Guide provides detail on the treatment of HSA contributions for small business owners. It is meant as a companion piece to our Employer guide and our HSA Employer Funding Guide which provides details on making HSA contributions for non-owner employees.

Sole Proprietors

How are sole proprietors treated for HSA contributions? Sole proprietors are treated similarly to individuals making HSA contributions on their own, the sole proprietor (the owner) may deduct the amount of their HSA contributions and health insurance payments on their personal income tax (in 2006 HSA contributions were on Line 25 and health insurance payments were on Line 29 of the 2006 Form 1040). Sole proprietors are not allowed to deduct their own HSA contributions as a business expense; however, amounts contributed on behalf of employees may be deductible on line 14 of the 2006 Schedule C. The owners HSA contribution is not a deduction attributable to the self-employed individual’s trade or business so it is not taken as a deduction on Schedule C, nor is it taken into account in determining net earnings from self-employment on Schedule SE.

Can self-employed people make pre-tax contributions to their HSAs? No. Self-employed people may not contribute to an HSA on a pre-tax basis. However, they may contribute to their HSA with after tax dollars and take the above the line deduction outlined above.

As a sole proprietor, can I make allow my employees to make pre-tax contributions to their HSAs? Yes. A sole proprietor with a number of employees may find it beneficial to institute a section 125 plan (or cafeteria plan) to allow employees to make pre- tax, salary deferrals into their HSAs. However, the sole proprietor would not be eligible to participate in such a plan.

Partnerships, LLCs, and 2% Owners of S-Corps

How are partners and 2% S-Corp owners treated for HSA Contributions?

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