What Is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged savings vehicle authorized under IRC Section 223 for individuals enrolled in a High-Deductible Health Plan (HDHP). The HSA offers a triple tax benefit that no other savings account matches: contributions are tax-deductible (or pre-tax if made through payroll), investment growth is tax-free, and withdrawals for qualified medical expenses under IRC Section 223(d) are tax-free.
As discussed in "Billionaire Wealth Strategies" (Jim Dew, 2024), Chapter 9, the HSA falls under both the "D" (Defer) and "P" (Pay Now, None Later) components of the DEAPR framework.
How Does an HSA Work?
For 2025, the IRS sets contribution limits under IRC Section 223(b) at $4,300 for individual HDHP coverage and $8,550 for family HDHP coverage. Participants aged 55 and older may contribute an additional $1,000 catch-up contribution. These limits are adjusted annually for inflation by the IRS.
To qualify for an HSA under IRC Section 223(c), the individual must be enrolled in an HDHP with a minimum deductible of $1,650 (self-only) or $3,300 (family) and a maximum out-of-pocket limit of $8,300 (self-only) or $16,600 (family) for 2025. The individual cannot be enrolled in Medicare, claimed as a dependent, or covered by a non-HDHP.
Unlike Flexible Spending Accounts (FSAs), HSA funds carry over indefinitely under IRC Section 223(f). There is no "use it or lose it" requirement. The account can be invested in stocks, bonds, mutual funds, or other assets offered by the HSA custodian, allowing long-term tax-free compounding.
After age 65, non-medical withdrawals are taxed as ordinary income under IRC Section 223(f)(4)(C) without the 20% penalty that applies to non-medical withdrawals before age 65. Medical withdrawals remain tax-free at any age. The post-65 treatment effectively converts the HSA into a supplemental traditional IRA for non-medical expenses, while preserving the triple tax benefit for medical spending.
When Do Entrepreneurs Use HSAs?
Healthy high-income earners maximize HSA contributions and invest the balance for long-term growth rather than spending on current medical expenses. Paying current medical costs out of pocket and allowing the HSA to compound tax-free for decades produces the greatest long-term benefit.
Retirement healthcare supplementation builds a dedicated tax-free fund for retirement medical expenses. According to Fidelity Investments, a 65-year-old couple retiring in 2024 may need approximately $315,000 for healthcare costs in retirement. The HSA addresses this specific liability with tax-free withdrawals.
Business owners with HDHPs can make employer HSA contributions that are deductible to the business under IRC Section 223(b) and excluded from the employee's gross income. For owner-employees of S-corporations, the deduction flows through to the individual return as an above-the-line deduction rather than a business deduction. C-corporation owner-employees receive the employer contribution tax-free.
How Does Dew Wealth Approach HSA Planning?
The HSA is a frequently underutilized tax-advantaged account. For entrepreneurs who can afford to pay current medical expenses out of pocket, maximizing HSA contributions and investing the balance creates a compounding vehicle with tax treatment that may be more favorable than both traditional and Roth IRAs for qualified medical expenses.
The triple tax benefit (deduction at contribution, tax-free growth, tax-free qualified withdrawal) is unmatched by any other account type. Traditional IRAs provide a deduction but tax withdrawals. Roth IRAs provide tax-free withdrawals but no deduction. The HSA provides both, though only for qualified medical expenses.
The HSA also has limitations. The maximum contribution is significantly lower than 401(k) or Cash Balance Plan limits. The HDHP requirement means higher out-of-pocket costs for medical care in the current year. Individuals with significant medical needs may find the HDHP deductible burdensome. Non-medical withdrawals before age 65 incur both ordinary income tax and a 20% penalty under IRC Section 223(f)(4)(A), making premature access costly.