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

A Health Savings Account (HSA) is a tax-advantaged savings account designed for individuals with high-deductible health plans (HDHPs) to save for medical expenses not covered by their insurance.

Contributions can be made by individuals, employers, or others, up to annual limits set by the IRS, with excess contributions subjected to tax.

Contributions, account earnings, and withdrawals for qualified medical expenses are tax-free.

HSAs offer potential investment opportunities, with funds that can carry over annually and are portable between jobs.

To qualify for an HSA, individuals need a qualified HDHP, no other health coverage, must not be enrolled in Medicare, and cannot be claimed as dependents.

2024 contribution limits are $4,150 for individuals and $8,300 for families, with catch-up contributions allowed for those 55 or older.

HSAs can be used for diverse medical expenses, although not generally for insurance premiums unless specific conditions are met like Medicare or COBRA.

HSAs differ from Flexible Spending Accounts (FSAs) which are employer-sponsored, not portable, and often require the use of funds within the plan year.

HDHPs paired with HSAs have lower premiums but higher deductibles.

After meeting the deductible, costs are typically shared between the insured and the plan, leaving the HSA to cover out-of-pocket expenses.

An advantageous feature of HSAs includes their "triple tax advantage": contributions and growth are untaxed, and withdrawals for qualified expenses are tax-free.

Starting an HSA early can benefit long-term medical and financial planning, especially as healthcare costs rise with age.