Health Savings Account

What Is a Health Savings Account (HSA)? A Simple Guide

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The account is designed to help individuals save for qualified medical expenses while offering significant tax benefits. Funds contributed to an HSA are not subject to federal income tax at the time of deposit, making it an effective tool for healthcare expense planning.

HSAs are owned by the individual account holder, which distinguishes them from employer-owned Health Reimbursement Arrangements (HRAs). This ownership feature provides account holders with complete control over their funds, regardless of employment status or changes in health insurance coverage.

The tax advantages of HSAs are threefold, often referred to as “triple-tax advantaged”. First, contributions reduce taxable income. Second, any interest or investment returns earned within the account grow tax-free. Third, withdrawals used for qualified medical expenses are not taxed. This combination of tax benefits makes HSAs more advantageous than traditional retirement accounts such as 401(k)s or IRAs in terms of tax efficiency.

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over and accumulate year to year if not spent. This rollover feature eliminates the “use it or lose it” pressure associated with some other healthcare savings options and allows for long-term healthcare expense planning.

HSA funds can be used to pay for a wide range of qualified medical expenses without federal tax liability or penalty. These qualified expenses include:

• Doctor visits and hospital services
• Prescription medications
• Dental and vision care
• Ambulance costs
• Psychological therapy and psychiatric care
• Acupuncture
• Hearing aids
• Qualified long-term care services

It’s worth noting that generally, insurance premiums are not considered qualified medical expenses, although there are some exceptions.

For individuals who use HSA funds for non-medical expenses, the withdrawals are treated similarly to those from an Individual Retirement Account (IRA). These non-qualified withdrawals may provide tax advantages if taken after retirement age but incur penalties if taken earlier.

HSAs are offered by various financial institutions including banks and credit unions. Many HSA providers also offer investment options for account holders, allowing them to potentially grow their healthcare savings over time through market investments.

Furthermore, HSAs have become an integral component of consumer-driven healthcare approaches, designed to encourage individuals to take more active roles in their healthcare decisions and spending.

How does a Health Savings Account (HSA) work?

Health Savings Accounts operate through a structured system of contributions, investments, and withdrawals, offering notable tax advantages and flexibility for healthcare spending.

Setting up an HSA begins with establishing an account with a qualified HSA trustee, which may include banks, insurance companies, or IRS-approved trustees of individual retirement arrangements. Importantly, the HSA can be established through a trustee different from your health plan provider.

The financial mechanics of HSAs revolve around their distinctive triple tax advantage. First, all contributions are tax-deductible, effectively lowering your overall taxable income. Second, any interest or investment earnings within the account grow completely tax-free. Third, withdrawals used for qualified medical expenses remain 100% tax-free.

Contributing to an HSA can be done through several methods. Account holders may make one-time or recurring contributions from a bank account, deposit checks, or set up direct deposit from payroll. Additionally, funds can be transferred from another HSA or, once in a lifetime, from an IRA for a federal income tax deduction. 

For 2024, contribution limits are INR 350,178.87 for individual coverage and INR 700,357.74 for family coverage. These limits will increase to INR 362,835.94 and INR 721,452.85 respectively in 2025.

When using HSA funds, account holders typically receive a debit card or checks to pay for qualified medical expenses directly. Alternatively, they can pay out-of-pocket and submit receipts for reimbursement later. Qualified expenses include:

• Copays and coinsurance
• Deductibles
• Prescriptions
• Dental and vision care
• Diagnostic devices
• Psychological treatments
• Special education services
• Long-term care

A key operational benefit of HSAs is their portability and rollover capability. Unlike Flexible Spending Accounts with “use it or lose it” rules, HSA funds roll over from year to year. Moreover, the account belongs to the individual rather than the employer, meaning it remains with the account holder through job changes or retirement.

For withdrawals used for non-qualified expenses before age 65, account holders must pay both income taxes and an additional 20% penalty. However, after turning 65, only regular income taxes apply to non-qualified withdrawals—no penalty. This feature effectively transforms the HSA into a supplemental retirement account after age 65.

Notably, HSA owners do not need to remain eligible for contributions to take tax-free withdrawals for qualified medical expenses. Once funds are in the account, they can be used tax-free for qualified expenses regardless of current health insurance status.

For those with investment options in their HSA, the withdrawal process may involve transferring funds from the investment portion to the cash portion before accessing them. This investment capability further enhances the long-term financial planning aspects of HSAs.

Who is eligible to open an HSA?

Eligibility for a health savings account (HSA) depends on meeting specific criteria established by tax regulations. First and foremost, individuals must be covered under a qualifying high-deductible health plan (HDHP) on the first day of the month for which eligibility is determined. For 2025, the minimum annual deductible for an HDHP must be at least INR 139,227.74 for individual coverage or INR 278,455.49 for family coverage.

Beyond HDHP coverage, several additional requirements must be satisfied simultaneously:

• The individual must not have any other health insurance coverage (with limited exceptions)
• The individual cannot be enrolled in Medicare
• The individual cannot be claimed as a dependent on someone else’s tax return

Concerning other health coverage, certain specific types of insurance do not disqualify HSA eligibility. These permitted coverages include disability insurance, dental insurance, vision insurance, and long-term care insurance. Consequently, individuals can maintain these supplementary coverages without losing HSA qualification.

Several circumstances specifically disqualify HSA eligibility. Individuals enrolled in standard health flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs) that cover qualified medical expenses cannot contribute to an HSA. Nevertheless, certain HSA-compatible versions exist, specifically post-deductible or limited-purpose health FSAs and HRAs.

Eligibility determination typically occurs monthly, assessed as of the first day of each month. Indeed, contributions can generally only be made for months in which all eligibility criteria are satisfied. Yet an important exception exists: under the “last-month rule,” individuals who are HSA-eligible on December 1 may be treated as eligible for the entire calendar year, subject to certain requirements.

For married individuals, each spouse who meets eligibility requirements must establish separate HSA accounts—joint HSAs are not permitted even when spouses share the same HDHP. Importantly, an individual can still qualify as HSA-eligible even if their spouse has non-HDHP family coverage, provided that coverage doesn’t extend to the HSA-eligible individual.

Veterans receiving healthcare benefits through the Department of Veterans Affairs may still qualify for HSA eligibility if they receive VA benefits exclusively for service-connected disabilities. Additionally, individuals aged 21-55 who are permanent residents or citizens may have expanded options, as some financial institutions maintain age-related criteria for account holders.

Contribution rules and limits for HSAs

Health Savings Account regulations establish specific contribution parameters, ensuring proper account management through clear monetary limitations and rules.

Annual contribution limits

Contribution limits for HSAs are set annually by the Internal Revenue Service. For 2024, individual coverage contribution caps stand at INR 350,178.87, while family coverage limits reach INR 700,357.74. These thresholds increase to INR 362,835.94 for individuals and INR 721,452.85 for families in 2025. Subsequently, 2026 limits will rise to INR 371,273.98 for individual coverage and INR 738,328.94 for family coverage. Contributions exceeding these limits incur a 6% excise tax annually until excess amounts are withdrawn.

Catch-up contributions for age 55+

Account holders aged 55 or older by the tax year’s end qualify for additional “catch-up” contributions of INR 84,380.45 annually. This supplemental amount applies regardless of coverage type. Importantly, catch-up contributions are calculated monthly. For married couples where both spouses are 55+ and HSA-eligible, each spouse must establish a separate HSA to utilize individual catch-up contributions. Individuals older than 65 cannot make HSA contributions.

Employer vs employee contributions

Anyone can contribute to an eligible individual’s HSA, including the account holder, employers, or family members. All contributions must be made in cash; stock or property contributions are prohibited. For employer-sponsored HSAs, both employer and employee may contribute simultaneously, provided combined amounts remain within annual limits. 

Employer contributions are typically excluded from employee income and reported on Form W-2 (Box 12, code W). These contributions reduce the employee’s allowable contribution amount. Furthermore, employers making HSA contributions must adhere to “comparability” rules, requiring equal dollar amounts or percentage contributions for all eligible employees to maintain tax deductibility.

Rollover and portability rules

One distinguishing feature of HSAs is complete account ownership by the individual, regardless of contribution source. All deposits become the policyholder’s property. Unused funds automatically carry over to subsequent years. When changing employment, HSA holders may consolidate multiple accounts through direct transfers or rollovers. Direct trustee-to-trustee transfers have no annual limits. 

Conversely, if receiving a distribution check personally, the amount must be redeposited within 60 days to avoid taxation, with only one such rollover permitted every 12 months. Additionally, individuals may perform a one-time rollover from an Individual Retirement Account to an HSA, though this counts toward the annual contribution limit.

What can HSA funds be used for?

HSA funds serve specific purposes with distinct tax implications based on how they are utilized. Understanding these usage rules helps account holders maximize the value of their health savings accounts.

Qualified medical expenses

HSA funds can be used tax-free for a wide range of qualified medical expenses (QMEs) designated by the IRS. These expenses primarily include medical, dental, vision, and prescription costs. Common eligible expenses encompass:

• Doctor visits, lab fees, and medical procedures
• Dental care, including cleanings, extractions, and braces
• Vision care, including eye exams, prescription glasses, and LASIK surgery
• Prescription medications and over-the-counter drugs
• COVID-19 supplies like masks and hand sanitizer
• Hearing aids and batteries
• Psychological and psychiatric care
• Acupuncture and chiropractic services

Importantly, transportation costs related to medical treatment, such as airfare for specialized care, are also reimbursable. Following the CARES Act, menstrual care products and over-the-counter medicines no longer require prescriptions for HSA reimbursement.

Non-qualified expenses and penalties

Using HSA funds for non-qualified expenses before age 65 triggers two financial penalties. Firstly, the withdrawn amount is added back to your gross income and subject to income tax. Secondly, an additional 20% penalty is applied to the withdrawal amount. For instance, withdrawing INR 84,380.45 for non-qualified expenses would result in approximately INR 33,752.18 in taxes and penalties, assuming a 20% tax rate.

Using HSA after age 65

Once account holders reach age 65, HSA usage rules become more flexible. At this age, funds can be withdrawn for non-qualified expenses without the 20% penalty, though regular income taxes still apply. Essentially, the HSA functions like a traditional IRA for non-medical withdrawals after age 65.

Furthermore, HSA funds can be used to pay for various Medicare-related expenses, including:

• Medicare Part A, B, D premiums
• Medicare Advantage (Part C) premiums
• Long-term care insurance premiums, with age-based limits ranging from INR 40,502.62 for those 40 and under to INR 502,907.49 for those 71 and older

Account holders aged 65+ can also use HSA funds to pay out-of-pocket expenses under Medicare, plus qualified medical expenses Medicare doesn’t cover, such as dental care and hearing aids.

HSA vs FSA vs HRA: Key differences

Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) differ significantly in structure, regulations, and benefits despite their shared purpose of financing healthcare expenses.

Ownership and portability

HSAs are individually owned accounts that remain with the person regardless of employment changes. In contrast, HRAs are employer-owned and non-portable; employees forfeit these accounts upon leaving the company. FSAs likewise stay with the employer, meaning funds cannot transfer when changing jobs.

Eligibility requirements

HSA eligibility necessitates enrollment in a qualified high-deductible health plan, no other medical coverage, and not being claimed as a dependent on another tax return. FSAs, nonetheless, are available to any employee whose employer offers this benefit, without health plan restrictions. HRAs are exclusively employer-provided, with companies determining specific eligibility criteria.

Rollover and investment options

Concerning unused funds, HSAs offer complete year-to-year rollover with no expiration. Conversely, FSAs traditionally follow “use-it-or-lose-it” rules, though some permit carryovers up to INR 54,003.49 or grace periods of 2½ months. HRA rollovers depend entirely on employer policies. Besides rollover differences, HSA funds can potentially grow through investment accounts, whereas both FSAs and HRAs lack investment opportunities.

Access to funds

In terms of fund accessibility, FSA participants can utilize their entire annual election amount immediately at the beginning of the plan year. Meanwhile, HSA holders can only access contributed amounts, whereas HRA funds become available according to employer-specified schedules.

Key Takeaways

Understanding HSAs can unlock significant healthcare savings and tax advantages for eligible individuals with high-deductible health plans.

• HSAs offer triple tax benefits: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses
• You must have a high-deductible health plan with minimum deductibles of $1,650 (individual) or $3,300 (family) in 2025
• Contribution limits for 2025 are $4,300 for individuals and $8,550 for families, plus $1,000 catch-up for ages 55+
• Unlike FSAs, HSA funds roll over indefinitely and remain yours even when changing jobs or retiring
• After age 65, HSAs function like retirement accounts with penalty-free withdrawals for any purpose (taxes still apply)

HSAs represent one of the most tax-efficient savings vehicles available, combining immediate tax deductions with long-term investment growth potential. When used strategically, they serve as both healthcare expense accounts and supplemental retirement savings tools.

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