High-deductible health plans (HDHPs) have lower monthly costs but require paying more upfront for necessary care due to their higher deductibles. To alleviate this burden, individuals with HDHPs can open Health Savings Accounts (HSAs). HSAs offer tax savings on funds reserved for eligible healthcare expenses, but that’s just the beginning of the many benefits that HSA owners enjoy.
What exactly is a Health Savings Account?
An HSA is a health benefits account that provides tax advantages, where participants can deposit a portion of their income before payroll taxes are deducted. To be eligible for an HSA, the account holder must be actively enrolled in an HDHP. The maximum contribution limit, which determines the amount individuals can set aside each plan year, varies depending on whether they have single coverage or family coverage.
For 2024, those with single coverage can contribute up to $4,150 per year, or with family coverage, up to $8,300. If the account owner is aged 55 or older, they can make an additional “catch-up” contribution of up to $1,000 a year.
HSA Tax Benefits
HSA account owners benefit from tax savings in three ways. For that reason, HSAs are often described as providing “triple-tax savings.” First, contributions made to HSA accounts reduce taxes, since they lower taxable income. Second, HSA funds withdrawn from the account to pay for eligible products and services are not taxed. Third, interest earned on the account balance, including gains from investing, is not taxed.
Once contributed to the HSA account, funds remain tax-free unless withdrawn to pay a non-eligible expense. In that case, the amount of the expense becomes taxable at the account owner’s current tax rate and is also subject to an early-withdrawal tax penalty (currently 20%) if the account owner is below the age of 65.
HSA Eligible Products and Services
HSA funds can be used to pay for a long list of IRS-approved healthcare products and services. HSA-eligible products can be purchased from pharmacies, grocery and department stores, and online stores like HSAStore.com.
Although qualified expenses don’t change very often, it’s good to revisit the list from time to time. For example, in 2011 over-the-counter (OTC) drugs and medications were removed from the list, only to be added back in 2020. Menstrual care products were recently added as well. Common healthcare expenses approved for HSA purchase include:
- Alcoholism and drug addiction treatment
- Ambulance services
- Artificial teeth
- Birth control and contraceptive devices
- Body scan (electronic)
- Braille reading material
- Breastfeeding supplies/lactation expenses
- Capital expenses (home improvements that accommodate a disabled person)
- COBRA insurance premiums
- Communication equipment for the deaf or speech impaired
- Contact lenses and eyeglasses
- COVID-19 PPE (Hand sanitizers, wipes, and masks for personal use)
- Crutches (purchased or rented)
- Dental treatments (most)
- Diagnostic devices (blood sugar monitors, blood pressure monitors, etc.)
- Disabled dependent expenses for medical care
- Eye exams
- Eye surgery
- Fertility treatments
- Guide dogs or other service animals
- Hearing aid expenses (batteries, repairs, and maintenance)
- Hospital services (including meals and lodging)
- Insulin and diabetic supplies
- Lead-based paint removal
- Long-term care and services for chronically ill individuals
- Medical conference expenses (personal chronic illness)
- Medicare Parts B and D premiums
- Menstrual care products
- Nursing home and services
- Organ transplants
- Oxygen and oxygen equipment
- Over-the-counter medications
- Physical examination (annual physical)
- Physical therapy
- Pregnancy test kits
- Prescription drugs and medicines
- Prosthesis (including artificial limbs and breast reconstruction surgery)
- Psychiatric care
- Smoking cessation medicines and treatment plans
- Special education
- Transportation expenses for medical treatments and services
- Vehicular expenses (for operational and design costs that accommodate a disabled person)
- Weight loss program (requires physician’s diagnosis)
- Wigs (for hair loss due to disease or medical treatment)
Since eligible healthcare expenses must address or prevent a physical or mental defect or illness, they don’t include products and services that benefit general health, like vitamins, supplements, or cosmetic improvements.
HSAs as a Retirement Tool
Unused HSA balances roll over from year to year and can be invested tax-free to grow over time. In this way, HSAs are comparable to traditional 401(k) retirement accounts. If HSA funds are not used for healthcare expenses, they can be withdrawn after reaching the age of 65 without penalties, although they will be subject to taxes based on the individual's tax rate at that time. However, any withdrawals made after age 65 for healthcare expenses continue to be tax-free.
- Many HSA plans come with convenient debit cards. When expenses are paid with a debit card, the account owner may be asked to provide receipts to verify the expense by their HSA administrator or in the case of an IRS audit.
- HSA account funds can pay for the qualified expenses of the account owner and tax dependents, whether or not the dependents are covered under the qualifying HDHP health plan.
- While similar spending accounts (such as FSAs) must be opened through an employer, HSAs are available from various sources, including banks, credit unions, etc. If your employer does not sponsor one, your HR or insurance carrier may be able to recommend vendors.
Rising healthcare costs have us all watching what we spend, and HSAs can be a win-win for employers and employees alike. Sponsoring HDHPs helps employers control their healthcare costs, and as more employees become eligible for HSA accounts, they gain triple-tax savings and long-term retirement benefits.
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.