Health Savings Account (HSA): How HSAs Work, Contribution Rules

A Health Savings Account (HSA) is a tax-advantaged account designed for individuals with high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions, made by individuals or employers, are tax-free and grow over time, potentially being invested to increase returns. These contributions are vested and can be carried over annually. Eligibility for an HSA requires having an HDHP, no other health coverage, not being enrolled in Medicare, and not being claimed as a dependent on another's tax return.

For 2024, the contribution limits are $4,150 for an individual and $8,300 for a family, with additional catch-up contributions allowed for individuals aged 55 or older. Contributions to an HSA can only be made in cash and can also be made by others, including family members. Self-employed or unemployed individuals can also contribute if eligible.

HSAs offer tax advantages: contributions are deductible, the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free. However, any non-qualified distributions are subject to income tax and, if under age 65, a 20% penalty.

HSAs differ from Flexible Spending Accounts (FSAs) because HSA funds roll over, are portable, and not tied to a specific employer. Unused FSA funds are forfeited at year-end. HSAs also allow for investments in stocks and other securities, potentially growing funds for future medical expenses or retirement. Qualified expenses cover a variety of medical services but generally not insurance premiums, except in specific situations like Medicare, COBRA, or long-term care insurance under certain conditions.

Overall, HSAs provide significant tax advantages and savings potential, particularly advantageous for those with increasing medical expenses as they age.