Using Open Enrollment to Optimize Your Taxes

11/10/2025

It’s that time of year. Open enrollment.

For most people, this means sifting through a mountain of confusing paperwork, comparing premiums, deductibles, and co-pays, and picking the “least bad” option.

But if that’s all you’re doing, you’re not just picking a health plan—you’re potentially throwing away thousands of dollars.

As tax professionals, we see it every day: clients who are laser-focused on their business's bottom line but are completely overlooking one of the most powerful tax shelters in the entire Internal Revenue Code. Your healthcare choice isn't just an HR decision; it's a high-level tax planning strategy.

Let’s reframe this. Stop thinking about cost and start thinking about opportunity.

Why Your Health Plan is Really a Tax Plan

Let's start with a hard truth from the IRS. For most people, medical expenses are not tax-deductible.

But what if you could pay for 100% of your healthcare—premiums, doctor visits, prescriptions, and even dental and vision—with pre-tax money? What if you could bypass that 7.5% floor entirely?

That’s what we’re here to talk about. The primary tools for this are the Health Savings Account (HSA), the Flexible Spending Account (FSA), and the Health Reimbursement Arrangement (HRA).

The "Unicorn" of the Tax Code: The Health Savings Account (HSA)

I don’t get excited about many sections of the tax code, but the HSA is the exception. It is the only account that offers a triple tax advantage. It’s like a 401(k) and a Roth IRA had a baby, and this baby can also pay for your root canal.

Here’s the "triple-threat":

1. Tax-Deductible Contributions: Money goes in 100% pre-tax. If you're in a 24% federal and 6% state tax bracket, every $1,000 you contribute instantly saves you $300.
2. Tax-Free Growth: The money in your HSA can be invested. It grows—through interest, dividends, and capital gains—100% tax-free.
3. Tax-Free Withdrawals: You can pull the money out at any time, at any age, 100% tax-free... as long as it's for a Qualified Medical Expense (QME).

How Do I Get One? The Two Paths to Eligibility (New for 2026!)

You can’t just get an HSA. You must be enrolled in a qualified health plan. But thanks to the new "One Big Beautiful Bill Act" (OBBBA), how you qualify for 2026 has completely changed. There are now two distinct paths.

Pathway 1: The Traditional Path (Employer & Non-Marketplace Plans)

This is the classic rule that still applies to most employer-sponsored group plans and any plan purchased outside the official ACA Marketplace.

To be HSA-eligible, this plan must be a High Deductible Health Plan (HDHP) that meets strict IRS definitions. For 2026, those are:

If your employer's plan meets these specs, you're eligible.

Pathway 2: The New Path (ACA Marketplace Plans)

This is the game-changer from the OBBBA, effective January 1, 2026. This law deems certain plans to be HSA-qualified, regardless of their structure.

If you purchase your own insurance on the individual ACA Marketplace (HealthCare.gov or a state exchange), your plan is automatically HSA-eligible if it is a:

• Bronze Plan (any of them)
• Catastrophic Plan (any of them)

This is a massive deal. Why? Because many of these plans were not HSA-eligible before. They might have pre-deductible copays or other features that violated the strict "Pathway 1" rules. The OBBBA scraps all that and gives them a green light. This is especially fantastic news for entrepreneurs and those using an ICHRA (more on that later).

How Much Can I Contribute?

The contribution limits are generous and, for 2026, they are:

• $4,400 for self-only coverage
• $8,750 for family coverage
• $1,000 "catch-up" contribution if you are age 55 or older.

The Secret Retirement Function

Here’s the pro-tip: we advise clients to try and never spend their HSA. If you can afford to pay for your medical costs out-of-pocket, let that HSA money grow.

Why? Because once you turn 65, the HSA gets another superpower. It essentially becomes a Traditional IRA. You can pull money out for any reason—a boat, a vacation, a home repair—and you’ll just pay regular income tax, exactly like a 401(k) withdrawal. But it’s still 100% tax-free for medical expenses, which you'll likely have more of in retirement.

HSA vs. FSA: Know the Difference

This is the single most common point of confusion. The Flexible Spending Account (FSA) sounds similar, but it's a completely different animal.

Analogy Time: An HSA is a personal savings account that's yours forever. An FSA is an employer's coupon book that expires at the end of the year.

Here are the key differences you must understand:

• Ownership:
  • HSA: You own it. Period. It's your personal bank account.
  • FSA: Your employer owns the account. You're just allowed to use it.
• Portability:
  • HSA: If you leave your job, your HSA goes with you, with every penny in it.
  • FSA: If you leave your job, you leave the money behind. It’s gone.
• The "Use-It-or-Lose-It" Rule:
  • HSA: Does NOT exist. The money is yours forever. Your balance rolls over and grows year after year.
  • FSA: This is the FSA's fatal flaw. You must spend (almost) all the money in your FSA by the end of the plan year. If you don't, you forfeit it to your employer.
• Investing:
  • HSA: You can invest your HSA funds in stocks, bonds, and mutual funds, letting it grow tax-free.
  • FSA: You cannot invest FSA money. It just sits as cash.

So, what's an FSA good for? It's a decent way to pay for predictable, short-term costs (like braces or known prescriptions) with pre-tax dollars. But it is not a wealth-building or savings tool. The HSA wins by a mile.

The Boss's Secret Weapon: The Health Reimbursement Arrangement (HRA)

The HSA and FSA are accounts. Now let’s talk about an employer strategy.

A Health Reimbursement Arrangement (HRA) is a formal, IRS-approved plan that allows a business to reimburse its employees (including you, the owner, in many cases) for their medical expenses and insurance premiums, tax-free.

Analogy Time: Think of an HSA like a debit card. You put money in, it's your account, and you spend it.

An HRA is like a company IOU. It's not an account you own. It's a formal, legally-structured promise from your company to reimburse you for medical expenses.

The magic is this: The business pays the expense, takes a tax deduction, and the reimbursement is 100% tax-free to the employee.

But be careful. You can't just start writing checks from the business account for Tylenol. Doing this improperly can trigger massive penalties. After the Affordable Care Act (ACA), "stand-alone" HRAs were effectively banned. The penalty? $100 per day, per employee. That's $36,500 per year, per person.

You must use one of the new, ACA-compliant structures. For small businesses, the two most important are the QSEHRA and the ICHRA.

Option 1: The "Simple" HRA (QSEHRA)

A QSEHRA (Qualified Small Employer HRA) is the simple, entry-level HRA.

• Who it's for: Employers with fewer than 50 full-time equivalent employees.
• The Catch: You cannot offer a traditional group health plan and a QSEHRA. It's one or the other.
• What it does: It reimburses employees tax-free for their individual health insurance premiums and other QMEs.
• The Limits: A QSEHRA has annual caps. For 2025, those limits are $5,850 (self) and $11,800 (family).

Option 2: The "Flexible" HRA (ICHRA)

An ICHRA (Individual Coverage HRA) is the powerful, flexible "super-HRA."

• Who it's for: Employers of any size.
• What it does: This is the game-changer. It allows you to reimburse employees for their individual marketplace (ACA) plans.
• The Perks (and this is huge):
  1. No Contribution Limits: The IRS does not set a cap. You can set the reimbursement amount as high or low as you want (within "reasonable" bounds).
  2. Total Flexibility: You can offer different reimbursement amounts to different classes of employees (e.g., $500/mo for salaried staff, $300/mo for hourly; or different amounts by location).

With an ICHRA, you are out of the health insurance business. You are no longer picking a "one-size-fits-all" group plan. You are simply giving your employees a tax-free allowance to go buy the plan they want.

FAQs

This is where clients usually start connecting the dots—and the questions fly.

Q: Can I have both an HSA and an HRA?

A: This is the most complex question, and the answer is "It depends." You cannot contribute to an HSA if you are covered by a "general purpose" HRA (like a QSEHRA or ICHRA) that reimburses expenses below the HDHP deductible. However, you can have an HSA with a "limited-purpose" HRA. This is an advanced strategy you must set up with a professional.

Q: I’m an S-Corp owner. Can I use an HRA for myself?

A: CRITICAL ALERT. If you are a >2% shareholder in an S-Corporation, the rules are different. HRA reimbursements for you (the owner) are generally not tax-free. They must be included as wages on your W-2. You can then (usually) deduct this as a self-employed health insurance deduction. It’s a complex "wash" that requires careful payroll setup. Mess this up, and you’re facing a nasty audit.

Q: What is a "Qualified Medical Expense" (QME)?

A: The list is huge (see IRS Publication 502). The big ones:

• Doctor, dentist, and vision co-pays and fees
• Prescription drugs and insulin
• Eyeglasses, contacts, and hearing aids
• Acupuncture and chiropractic care
• Addiction treatment and smoking cessation programs
• What's NOT included: Vitamins, supplements (for general health), cosmetic surgery (that isn't reconstructive), and your gym membership (unless specifically prescribed by a doctor to treat a diagnosed disease like obesity).

The Choice is Yours

Open enrollment isn't a chore. It's a strategic checkpoint. Are you going to just "pick a plan," or are you going to implement a tax strategy?

An HSA can become a six-figure retirement account. An ICHRA can solve your entire company's healthcare problem. A simple FSA can save you a few hundred bucks on glasses.

But these are not DIY projects. Setting them up incorrectly can lead to disqualified plans, back taxes, and those terrifying $100-per-day penalties.

We specialize in this. We help business owners like you navigate the code, structure these plans for maximum benefit, and keep you 100% compliant.

Sign up today for a FREE discovery call.

Greg Tobias, Enrolled Agent

Admitted to practice before the Internal Revenue Service

Sources

• Internal Revenue Code § 105 (Amounts received under accident and health plans)
• Internal Revenue Code § 106 (Contributions by employer to accident and health plans)
• Internal Revenue Code § 125 (Cafeteria plans, re: FSAs)
• Internal Revenue Code § 213 (Medical, dental, etc., expenses)
• Internal Revenue Code § 223 (Health savings accounts)
• Internal Revenue Code § 4980D (Penalty on failure to meet group health plan requirements)
• One Big Beautiful Bill Act of 2025, Pub.L. 119-XX (re: HSA eligibility expansion)
• IRS Revenue Procedure 2025-19 (2026 Inflation Adjusted Amounts for HSAs/HDHP)
• IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
• IRS Publication 502, Medical and Dental Expenses
• IRS Notice 2002-45 (HRA Guidance)