Health Savings Accounts (HSAs) are versatile tools for saving on healthcare expenses while offering substantial tax benefits.
However, specific rules govern how HSAs work, including eligibility, contributions, withdrawals, and eligible expenses. Understanding these rules is crucial to maximizing the benefits of an HSA.
What is an HSA?
An HSA is a tax-advantaged account designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. The account offers a triple tax advantage:
- Contributions are tax-deductible or made with pre-tax dollars.
- Earnings grow tax-free.
- Withdrawals for qualified medical expenses are tax-free.
HSAs were created in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act to make healthcare more affordable.
Eligibility Rules for HSAs
To open and contribute to an HSA, you must meet the following requirements:
- Be enrolled in a high-deductible health plan (HDHP).
- Have no other health coverage (with certain exceptions).
- Not be enrolled in Medicare.
- Not be claimed as a dependent on another person’s tax return.
What is a High-Deductible Health Plan?
For 2024, an HDHP must have:
- A minimum deductible of $1,600 for individual coverage or $3,200 for family coverage.
- An out-of-pocket maximum of $8,050 for individual coverage or $16,100 for family coverage.
Eligible HSA Expenses
You must use your HSA funds for qualified medical expenses to take full advantage of its tax benefits. The IRS defines qualified medical expenses as costs related to the diagnosis, treatment, or prevention of disease, or affecting any part or function of the body.
Common Eligible Expenses:
- Medical: Doctor visits, hospital care, and prescriptions.
- Dental: Routine checkups, braces, and dentures.
- Vision: Eye exams, glasses, and contact lenses.
- Other: Mental health services, fertility treatments, medical supplies like bandages, and even service animals.
Examples of IRS-Eligible Medical Expenses:
- Acupuncture
- Ambulance services
- Birth control
- Chiropractic care
- Eyeglasses
- Hearing aids
- Surgery (medically necessary)
- X-rays
Non-Eligible HSA Expenses
HSA funds cannot be used for items that the IRS considers “beneficial to general health” or not primarily for the treatment of a physical or mental illness.
Common Non-Eligible Expenses:
- Cosmetic surgery (unless medically necessary)
- Gym memberships
- Maternity clothes
- Teeth whitening
- Vitamins or supplements (unless prescribed)
- Health insurance premiums (with some exceptions, such as COBRA or Medicare Part B, C, and D after age 65)
HSA Contribution Rules
For 2024, the IRS has set the following HSA contribution limits:
- $4,150 for individual coverage.
- $8,300 for family coverage.
- $1,000 catch-up contribution for individuals 55 or older.
Contributions can be made by either the employee, their employer, or both, but the total contribution cannot exceed the IRS limit. Employer contributions reduce how much an employee can personally contribute.
HSA Withdrawal Rules
You can use your HSA funds tax-free to pay for qualified medical expenses at any time. However, nonqualified withdrawals are subject to taxes and penalties:
- Before age 65: Nonqualified withdrawals incur a 20% penalty plus regular income tax.
- After age 65: Nonqualified withdrawals are only subject to regular income tax but no penalty.
HSA Reimbursement Rules
If you pay for medical expenses out of pocket, you can reimburse yourself from your HSA later. There’s no deadline for reimbursement, allowing you to maximize your account’s growth. However, you should keep receipts in case of an IRS audit.
Using an HSA in Retirement
HSAs can also serve as a retirement savings tool. After age 65, you can withdraw funds from your HSA for any purpose without penalty.
While non-medical withdrawals will be taxed, medical withdrawals remain tax-free, making HSAs a valuable asset for healthcare costs in retirement.
Health Savings Accounts offer significant tax benefits but come with strict rules about eligibility, contributions, and withdrawals.
Knowing what qualifies as a medical expense, how much you can contribute, and when to take penalty-free withdrawals helps you maximize the benefits of your HSA while staying compliant with IRS regulations.
FAQs
Who is eligible to open an HSA?
You must be enrolled in a high-deductible health plan (HDHP) and meet certain requirements, including not having other health coverage or being claimed as a dependent.
What are the HSA contribution limits for 2024?
For 2024, the contribution limits are $4,150 for individuals and $8,300 for families. Those aged 55 or older can contribute an additional $1,000.
Can I use my HSA for non-medical expenses?
Before age 65, non-medical withdrawals incur a 20% penalty and income tax. After age 65, non-medical withdrawals are only subject to income tax.
What expenses are not eligible for HSA reimbursement?
Expenses not considered medically necessary, such as cosmetic surgery, gym memberships, vitamins, and general health supplements, are not eligible.
What happens if I exceed the HSA contribution limit?
Excess contributions are subject to a 6% excise tax for each year they remain in the account unless corrected.
