Available since 2005, Health Savings Accounts are gaining popularity due to the ability they give account owners to pay for qualified healthcare expenses, reduce taxes, and set aside additional funds for retirement.
Health Savings Accounts are commonly referred to by the acronym "HSA." Many people who don't have HSAs have many questions about these powerful tax-advantaged tools, including how to qualify for an account, what expenses are eligible, how to open an account, and more. Here’s what you need to know.
Health Savings Account FAQs
What is an HSA?
The IRS defines a Health Savings Account as “a tax-exempt trust or custodial account set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.” Simply put, the funds in an HSA account can be used to pay for various IRS-approved healthcare expenses. Funds deposited into an HSA are tax-free, and when used for qualified expenses, account withdrawals are also tax-free.
How do I qualify for a Health Savings Account?
To enroll in an HSA, individuals must meet several requirements as outlined by the IRS:
- Already covered by (or simultaneously enrolling in) a High Deductible Healthcare Plan (HDHP)
- No additional health coverage (with certain exceptions)
- Not enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return
What is a High Deductible Health Plan (HDHP)?
An HDHP is a health insurance plan with that charges lower premiums in exchange for higher deductibles. The premium is the amount consumers pay each month for coverage under the plan. The deductible is the amount the plan holder has to pay for covered expenses before the carrier begins paying. One goal of an HDHP is to reduce healthcare costs by making people better healthcare consumers.
How do I know if I qualify for an HSA?
An HSA-qualified HDHP must:
- Meet the minimum deductible. In 2024, HDHPs must have a deductible of no less than $1,600 for singles and $3,200 for families
- Meet the out-of-pocket maximum. In 2024, that’s $8,050 for individuals and $16,100 for families
- Not offer any benefit other than preventative care before meeting the annual deductible. This includes non-preventative prescription drugs covered by a co-pay without first meeting the annual deductible
How does a Health Savings Account work?
Employees who have an HSA set aside a fixed contribution amount before payroll taxes are calculated for deposit into the account. That makes the contribution tax-free. Contributions can be made through age 65 as long as all IRS requirements are met. As you incur medical expenses, you can withdraw money to pay for qualified healthcare expenses without owing taxes on the withdrawals. Also, any balance in the account accrues tax-free interest (and tax-free investment gains, if unused funds are invested to grow the balance).
Who owns an HSA?
Unlike similar types of healthcare accounts – such as Flexible Spending Accounts (FSAs) and Healthcare Reimbursement Arrangements (HRAs) – you own the HSA. The HSA goes with you if you change employers; the money remains yours until you use it all or close the account.
How much can I contribute to my HSA?
In 2024, employees with self-only health coverage can contribute a maximum of $4,150 per year. Those with family coverage can contribute up to $8,300. HSA participants age 55 or older can make an additional “catch-up” contribution of $1,000 annually above the standard limits.
What can I buy with my Health Savings Account?
To maintain their tax-free status, HSA funds must be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Service. These include a wide variety of healthcare services, including dental and vision, that involve the diagnosis, cure, mitigation, treatment, or prevention of disease and the costs for treatments affecting any part or function of the body. HSA funds can also pay for many over-the-counter healthcare products.
A Health Savings Account can also be used as a savings/investment account because the money stays in the account until you use it. This makes HSAs a valuable tool for increasing your retirement savings because any interest earned on the money is tax-free.
Does an HSA roll over?
Yes! Because the funds in the account belong to you, they automatically roll over each year and remain in the account indefinitely until you use them. This is unlike other healthcare accounts, which often have a “use it or lose” requirement that means you forfeit some or all unused account funds at at the end of the plan year.
Can my spouse use my Health Savings Account?
Yes. HSA funds can pay for any approved healthcare expenses incurred by your spouse, children, or anyone that is a legal dependent for income tax purposes.
How can I set up an HSA?
If your employer does not offer an HSA, you can set up an account through a bank, credit union, broker, insurance company, or financial advisor that offers them. Because HSAs can be used to augment retirement savings, it pays to treat them like you would any other investment account:
- Avoid plans with high administrative fees.
- Look for a provider that offers a quick, efficient process for withdrawing funds or receiving reimbursements for your medical expenses
- Understand your investment options
- Make sure the plan has a debit card and allows you to manage your account online, if not also via a mobile app
Can I withdraw money from my Health Savings Account?
Yes. You can withdraw funds at any time for any purpose. However, the money must pay for qualified healthcare expenses to retain its tax-free status.
Can I withdraw money from my HSA for non-medical purposes?
Yes, but remember that any funds withdrawn and used for non-qualified medical expenses will be taxed at your income tax rate plus a 20% early-withdrawal penalty if you have not reached age 65. After age 65, Health Savings Account funds can be used for any purpose without incurring the early-withdrawal penalty.
Who can contribute to a Health Savings Account?
You and your employer can contribute to your account. In addition, anyone can contribute on your behalf, including family members.
Can you change HSA contributions mid-year?
Yes. You may change the amount you deposit into your HSA account anytime during the plan year. If you make contributions from your paycheck, be sure to notify your employer of the change. You can also make non-payroll contributions using your online account management portal. But remember, any contributions that exceed the maximum limit in any plan year are taxable. Learn more about how a mid-year status change impacts HSA contribution limits.
DataPath has been a full-service TPA solutions provider for nearly four decades. The company’s cloud-based Summit platform is the industry’s first all-in-one solution for CDH, HSA, Well-Being, COBRA, and Billing administration. Please enter your email (above right) to be notified when new blog articles are published.