Health Savings Account (HSA)

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged account for people covered by a qualified high-deductible health plan (HDHP). Contributions (from you or your employer) are invested tax-free and can be withdrawn tax-free for qualified medical expenses. Balances roll over year to year and the account is portable if you change jobs.

Key benefits

• Triple tax advantage:
• Contributions are tax-deductible or excluded from income when made via payroll.
• Earnings grow tax-free.
• Withdrawals are tax-free when used for qualified medical expenses.
• Funds can be invested, enabling long-term growth.
• Unused balances carry forward and the account is portable.

Eligibility

To contribute to an HSA you must:
* Be covered by a qualified HDHP.
* Have no other disqualifying health coverage.
* Not be enrolled in Medicare.
* Not be claimed as a dependent on someone else’s tax return.

Once you enroll in Medicare you can no longer make contributions, though you can still take tax-free distributions for qualified medical expenses.

Contribution rules and limits

• Contribution limits (total of employee + employer):
• 2024: $4,150 for individuals; $8,300 for families.
• Catch-up contribution: additional $1,000 for those age 55 and older.
• Contributions must be made in cash.
• Excess contributions are subject to a 6% excise tax.
• Contributions do not have to be spent in the year they’re made; unused funds roll over.

HDHP requirements and cost sharing

HDHPs feature higher deductibles and lower premiums. Minimums and out-of-pocket maximums (2024):
* Minimum deductible: $1,600 individual / $3,200 family.
* Out-of-pocket maximum: $8,050 individual / $16,100 family.

Example: If your deductible is $1,600 and you incur $3,500 in covered charges, you pay the first $1,600. After that, the insurer may cover a percentage (e.g., 80–90%) of the remaining amount and you pay the balance until reaching the out-of-pocket max.

Qualified expenses and withdrawals

• Qualified medical expenses include doctor visits, dental and vision care, prescription drugs, co-pays, and many other IRS-defined medical costs.
• Insurance premiums generally are not qualified expenses, except for:
• Medicare premiums (for those age 65+),
• COBRA or other continuation coverage while unemployed,
• Long-term care insurance (subject to limits).
• Distributions used for qualified expenses are tax-free.
• Non-qualified withdrawals are taxed as income and incur a 20% penalty; the 20% penalty is waived after age 65 (regular income tax still applies).

Recordkeeping and reporting

• Distributions are reported on IRS Form 1099-SA.
• Maintain receipts and records to substantiate qualified medical withdrawals.

Investment and administrative considerations

• Many HSAs allow investing in stocks, mutual funds, or other securities once balances meet a minimum.
• HSAs may have fees and custodial rules—shop different custodians (banks, brokerages, third-party administrators) for fees, investment options, and services.

Pros and cons

Pros
* Tax-deductible contributions and tax-free growth and qualified withdrawals.
* Funds roll over indefinitely and are portable.
* Investment potential can turn an HSA into a long-term savings vehicle for healthcare in retirement.

Cons
* Must have an HDHP and be able to handle higher out-of-pocket costs.
* Requires liquidity to fund the account and cover early medical expenses.
* Additional recordkeeping and tax-filing requirements.
* Excess contributions incur penalties.

Portability and beneficiaries

• HSAs are owned by the individual, not the employer—accounts transfer with you when you change jobs.
• On the account holder’s death:
• If the beneficiary is a spouse, the HSA can transfer tax-free and become the spouse’s HSA.
• If the beneficiary is not a spouse, the account stops being an HSA and the beneficiary is taxed on the fair market value in the year of death (with certain exceptions for qualified medical expenses paid within one year).

HSA vs. FSA — key differences

• Ownership: HSAs are owned by the individual; FSAs are employer-owned.
• Portability: HSAs are portable; FSAs generally are not (funds may be lost when you leave a job).
• Rollover: HSA funds roll over indefinitely; most FSAs are “use-it-or-lose-it” (limited grace/rollover options exist for some FSAs).
• Eligibility: HSAs require HDHP enrollment; FSAs do not.
• Contribution limits (2024): HSA individual $4,150 / family $8,300; FSA limit $3,200.

Common questions

Q: Can self-employed people open an HSA?
A: Yes, if they have a qualifying HDHP. HSAs are offered through banks, brokerages, and HSA administrators.

Q: Do I have to spend HSA funds each year?
A: No. HSA funds roll over and can be saved and invested for future medical needs or retirement healthcare costs.

Q: Can I pay insurance premiums with HSA funds?
A: Generally no. Exceptions include Medicare premiums (for those 65+), COBRA while unemployed, certain unemployment-related coverage, and limited long-term care insurance.

Bottom line

HSAs provide powerful tax advantages and flexibility for paying and saving for healthcare expenses. They are especially valuable for people who can afford HDHP out-of-pocket costs, want to invest HSA balances for long-term growth, and plan to use the account as a supplemental retirement healthcare fund. Evaluate HDHP costs, your cash flow needs, fees, and investment options when deciding whether an HSA is right for you.