I have brokered health insurance for over a hundred startups. At least half the founders ask the same question within the first ten minutes: “Should we do an HSA?”
They’ve read the blog posts. They’ve seen the TikToks. Triple tax advantage. Tax-free in, tax-free growth, tax-free out. The only account in the American tax code that lets you skip taxes at every stage. Better than a 401(k). Better than a Roth IRA.
They’re not wrong. But they are missing something important.
To open an HSA, you need a high-deductible health plan. And high-deductible health plans make people sicker.
A Brief History of Making People Pay
The intellectual case for HSAs was built on a single finding from the RAND Health Insurance Experiment, a landmark study from 1974 to 1982. RAND found that when people paid more out of pocket, they spent about 30% less on healthcare. Congress loved this. What they cited less often was the other finding: cost sharing reduced effective and ineffective care in roughly equal proportions. People didn’t become smarter consumers. They just avoided the doctor.
The deductible is a blunt instrument. It does not distinguish between a frivolous visit and a necessary one. It only distinguishes between people who can afford to pay and people who cannot.
Congress created Health Savings Accounts on December 8, 2003, embedding them inside a Medicare prescription drug bill. The deal was simple: accept a high deductible, get a tax-advantaged savings account. The theory was consumer-directed healthcare → give patients “skin in the game” and they’ll shop around, skip the unnecessary MRI, think twice before visiting the ER.
Twenty-two years later, 39 million Americans hold HSAs with $147 billion in total assets.
The Triple Tax Advantage, Explained
The mechanics are elegant. Contribute pre-tax dollars, up to $4,400 individual or $8,750 family in 2026. If routed through a Section 125 cafeteria plan, those dollars dodge federal income tax, state income tax, and FICA payroll taxes. That last part is the edge over a traditional IRA: you skip the 7.65% payroll tax too.
The money grows tax-free. Invest in index funds, ETFs, bonds — no taxes on gains as long as it stays in the account. Withdraw for medical expenses at any age, pay zero tax. After 65, it functions like a traditional IRA for non-medical withdrawals. No required minimum distributions, ever.
The catch is the entry ticket.
The Price of Admission
To contribute to an HSA, you must be on a qualified high-deductible health plan. In 2026: minimum $1,700 deductible for individuals, $3,400 for families. No benefits can be paid before the deductible except preventive care and telehealth.
The IRS enforces this with precision. I’ve had founders ask: what if we pair an HDHP with an FSA and use FSA dollars to cover the deductible, effectively zeroing it out? The IRS anticipated this. A general-purpose FSA counts as “other health coverage.” The moment an employee has access to one, HSA eligibility dies. It doesn’t matter whether they use it. Eligibility alone kills it.
You can pair an HDHP with a limited-purpose FSA for dental and vision. You can fund your employees’ HSAs on day one, effectively covering the deductible through the account itself. But between the medical visit and the reimbursement, there’s friction. The employee thinks about the out-of-pocket bill. They hesitate.
That hesitation is the feature, not the bug.
What Hesitation Actually Costs
A 2023 JAMA Network Open study followed diabetic patients whose employers forced them onto HDHPs. Emergency visits and hospitalizations for severe hyperglycemia rose 25%. Each additional year of enrollment increased the risk by another 5%.
Harvard researchers linked HDHPs with a 4.6-month delay in detecting metastatic cancer. In oncology, that is not a rounding error.
Women switched from low-deductible plans to HDHPs experienced delays of nearly seven months to breast cancer diagnosis, across the income spectrum. The researchers expected this for low-income women. They did not expect it for high-income ones. Cost sharing changes behavior regardless of ability to pay.
A paper published in JAMA Network Open just weeks ago found cancer survivors on HDHPs had a mortality hazard ratio of nearly 1.5 compared to traditional plans. The association held after controlling for income, education, and race.
The RAND experiment told us in 1982 that cost sharing cuts needed and unneeded care equally. Forty-four years of research has confirmed it. The deductible does not make people better healthcare consumers. It makes them avoidant ones.
The Payroll Tax You Didn’t Budget For
There’s a second cost no one mentions at the seed stage: operational complexity.
To give employees the full FICA exemption on HSA contributions, you need a Section 125 cafeteria plan: a written IRS document outlining benefits, eligibility, contribution limits, and election procedures. You need a third-party administrator ($2–8 per employee per month). You need annual nondiscrimination testing, which is a particular headache for startups where the founders are the highest-paid employees. You need to file Form 5500 with the Department of Labor. Report employer HSA contributions on W-2s using Box 12 Code W. Integrate a separate HSA custodian with your payroll system.
Skip the Section 125 plan and contribute directly? You’re subject to IRS comparability rules: identical amounts for every employee, with a 35% excise tax if you mess it up.
For a ten-person startup, this overhead is disproportionate. You’re building compliance infrastructure to support a tax shelter that requires putting your team on insurance designed to make them think twice about seeing a doctor.
The Question You Should Actually Ask
The question isn’t “should we offer an HSA?” It’s: what problem are you solving?
If the answer is “minimize my employees’ tax burden”, the HSA is attractive in theory but comes packaged with insurance that discourages utilization. You’re optimizing for tax efficiency while degrading the actual benefit.
If the answer is “I want my team to get care without worrying about cost”, a zero-deductible plan achieves this directly. No tax shelter required. No plan document. No custodian. No nondiscrimination testing.
Congress is currently trying to decouple HSAs from high-deductible plans entirely. If that passes, the calculus changes. Until then, you’re trading your team’s health access for a tax bracket optimization.
For a founder who treats health benefits as a recruiting tool and not a compliance checkbox, that’s a bad trade.