What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged savings account designed for individuals covered by high-deductible health plans (HDHPs) to save and pay for qualified medical expenses. HSAs offer several financial benefits, including tax-free contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses. This “triple tax advantage” makes HSAs an attractive option for individuals looking to manage healthcare costs while also building savings for future medical expenses.
Eligibility Requirements
To contribute to an HSA, an individual must be enrolled in a qualified HDHP. The Internal Revenue Service (IRS) sets minimum deductible and maximum out-of-pocket expense limits for these plans.
For the 2024 tax year, an HDHP must have a minimum deductible of $1,600 for individuals or $3,200 for families, with an annual out-of-pocket maximum of $8,050 for individuals and $16,100 for families.
For 2025, these limits increase to $1,650 and $3,300 for minimum deductibles, and $8,300 and $16,600 for out-of-pocket maximums. Additionally, individuals cannot be enrolled in Medicare, have other disqualifying health coverage, or be claimed as a dependent on another person’s tax return.
Contribution Limits
HSA contributions are capped annually and are adjusted for inflation. For 2024, individuals can contribute up to $4,150, while families can contribute up to $8,300. In 2025, these limits increase to $4,300 for individuals and $8,550 for families. Individuals aged 55 or older can make an additional $1,000 in catch-up contributions. Contributions can be made by individuals, employers, or both, and contributions made through payroll deductions under a cafeteria plan are tax-free.
Tax Advantages of an HSA
HSAs offer significant tax advantages:
- Tax-Deductible Contributions: Contributions made by individuals are tax-deductible, reducing taxable income.
- Tax-Free Growth: Earnings and interest on HSA funds grow tax-free, similar to a retirement account.
- Tax-Free Withdrawals: Withdrawals used for qualified medical expenses are not subject to income tax.
These tax benefits make HSAs more advantageous than traditional savings or retirement accounts, as they provide tax-free withdrawals for medical expenses at any time.
Qualified Medical Expenses
HSA funds can be used for a wide range of IRS-approved medical expenses, including:
- Doctor visits, surgeries, and hospital care
- Prescription medications
- Dental and vision care (cleanings, braces, eyeglasses, contact lenses)
- Mental health services, including therapy and psychiatric care
- Certain over-the-counter medications and medical supplies, if prescribed
- Transportation costs for medical care
HSA funds generally cannot be used to pay for health insurance premiums, except in specific cases such as COBRA coverage, long-term care insurance, or Medicare premiums after retirement.