A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). HSAs are designed to help individuals save money specifically for medical expenses not covered by their HDHP, such as deductibles, copayments, and other qualified medical expenses.
Here’s how an HSA typically works:
Eligibility
To be eligible to open and contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). An HDHP is a type of health insurance plan characterized by higher deductibles and lower premiums compared to traditional health insurance plans. The IRS sets specific criteria for what qualifies as an HDHP, including minimum deductible amounts and maximum out-of-pocket limits. You cannot have any other health coverage that is not an HDHP, with certain exceptions like dental, vision, disability, or long-term care insurance. You also cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return. This year, your HDHP must have a deductible of at least $1,600 for single coverage and $3,200 for family coverage.
Contribution Limits
Each year, the IRS sets limits on how much you can contribute to your HSA. For 2024, the contribution limits are $4,150 for individuals and $8,300 for families, up from 2023. These limits may change annually to adjust for inflation. If you’re 55 or older, you can make an additional catch-up contribution of $1,000 per year. Contributions can be made by you, your employer, or both, up to the allowable limit. Contributions made by your employer are typically excluded from your taxable income.
Tax Advantages
Contributions to an HSA are tax-deductible, meaning you can subtract them from your taxable income when you file your taxes. This reduces your overall tax liability, potentially resulting in a lower tax bill. If your employer contributes to your HSA, those contributions are also excluded from your taxable income. Additionally, any interest or investment earnings on the funds in the HSA are tax-free, allowing your savings to grow faster.
Withdrawals
You can withdraw money from your HSA tax-free at any time to pay for qualified medical expenses. These expenses typically include deductibles, copayments, coinsurance, and other medical expenses not covered by your HDHP. The IRS defines qualified medical expenses and includes a wide range of healthcare services and products. If you withdraw funds for non-qualified expenses before age 65, you may be subject to income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw funds for any purpose without penalty, but non-qualified withdrawals are subject to income tax.
Portability
HSAs are portable, meaning the funds belong to you and can be carried over from year to year, even if you change jobs, switch health insurance plans, or retire. Unlike Flexible Spending Accounts (FSAs), which have “use-it-or-lose-it” rules, funds in an HSA roll over from year to year and continue to grow tax-free.
Investment Options
Some HSA providers offer the option to invest your HSA funds in a range of investment options, similar to a 401(k) or IRA. This allows your HSA to potentially grow over time, providing even more funds for future medical expenses. Investing your HSA funds can help them keep pace with inflation and build a larger pool of funds for healthcare costs in retirement. However, it’s essential to consider your risk tolerance and investment goals when choosing investment options for your HSA.
If you have any questions on your HSA, reach out to us at 417.823.7171 or at info@abacus.cpa.
