Updated Guidelines for Health Savings Accounts (HSAs) in 2023 and 2024
Health saving accounts (HSAs) are tax-favored accounts that individuals can utilize to set aside funds for medical expenses. These accounts serve not just for medical needs but also serve as an effective retirement savings tool. The money contributed to an HSA grows tax-free and can be withdrawn without taxes after the age of 65 for any purpose.
There are specific rules dictating who is eligible for an HSA, the maximum amount that can be contributed, and the use of withdrawals prior to age 65. Below are the key HSA principles to be aware of:
Eligibility criteria
HSA eligibility requirements
To contribute to an HSA, you need to meet certain conditions, including:
- Your current health insurance coverage falls under the classification of a high-deductible health plan (HDHP). Determining if your insurance matches this classification depends on the following factors:
- For self-only (individual) coverage, the minimum annual deductible for 2025 should be at least $1,650 ($1,600 in 2024), and the maximum out-of-pocket annual expenses are capped at $8,300 ($8,050 in 2024).
- For family coverage, the minimum annual deductible in 2025 should be at least $3,300 ($3,200 in 2024), and the maximum out-of-pocket annual limit should not exceed $16,600 ($16,100 in 2024).
- You do not have any other healthcare coverage, except for limited exceptions, which may include coverage for specific illnesses, hospitalization, dental or vision care, long-term care, accident or disability, workers' compensation claims, tort laws, or property ownership liabilities.
- You are not declared as a dependent by someone else for tax purposes.
- You are not enrolled in Medicare. If you are enrolled in Medicare Part A and/or B, you cannot contribute to an HSA.
Contribution guidelines
HSA contribution guidelines
Contributing to an HSA and investing the funds allows your money to grow tax-free for an extended period. The Internal Revenue Service (IRS) sets limits on the annual contribution amount, which vary periodically. Here are the maximum contribution amounts for an HSA in 2025:
- For self-only coverage, you can contribute up to $4,300 ($4,150 in 2024).
- For family coverage, you can contribute up to $8,550 ($8,300 in 2024).
- For individuals aged 55 or older, you can contribute an extra $1,000 as a catch-up contribution.
If your employer contributes to your HSA on your behalf, this contribution is included in your annual limit. HSA contributions vest immediately, meaning that any employer contribution is yours even if you leave your job shortly after the contribution.
Your HSA contributions are deductible from taxes up to the amount contributed in a year. Employer contributions to HSAs are not considered as part of your income and are not taxed. However, employer contributions are displayed on your W-2 form in Box 12 and grant a tax benefit to your employer.
Employers offering HSA plans are subject to non-discrimination rules to prevent them from providing HSAs unfairly to highly compensated employees. Employers may provide additional funds to HSAs for certain employees but cannot only offer HSAs to high earners.
Withdrawal principles
HSA withdrawal principles
Withdrawing money from an HSA for reasons other than to pay for eligible medical expenses results in a 20% penalty on the amount withdrawn except if you are 65 or older. This penalty is double the 10% penalty applied to early withdrawals from a 401(k) or IRA. Money withdrawn from an HSA but not used for qualified medical or dental expenses is taxable as ordinary income, regardless of whether a penalty is incurred.
Unlike Flexible Spending Accounts (FSAs), there is no requirement to spend HSA funds in the same year you make the contribution. Furthermore, there are no rules for required minimum distributions (RMDs) applicable to other types of pre-tax retirement savings accounts such as 401(k)s or traditional IRAs.
Qualifying medical expenses
What constitutes a qualifying medical expense for an HSA?
The IRS defines qualifying medical expenses as "the costs related to the diagnosis, treatment, cure, or prevention of disease, and for the purpose of affecting any part or function of the body."
The IRS does not consider a medical expense as "qualifying" just because it may generally benefit your health. For instance, vacation costs are non-qualifying expenses, regardless of their potential positive impact on mental or physical health. Qualifying expenses must pertain primarily to alleviate or prevent a physical or mental disability or illness.
The IRS provides a comprehensive list of qualifying expenses in Publication 502 to help you determine if HSA funds can be used to pay for a particular product or service. You can use HSA funds to pay for qualifying expenses not only for yourself but also for eligible dependents.
Generally, you can utilize Health Savings Account (HSA) funds for various medical services, including treatments by practitioners, diagnostic devices, supplies, and equipment needed by providers. Some frequent HSA-qualified expenses include:
- Prescription medications
- Alternative therapies such as acupuncture and chiropractic care
- Emergency medical services like ambulance rides
- Dental care, including dentures
- Eye care, including contact lenses and glasses
- Fertility treatments
- Hearing aids
The Internal Revenue Service (IRS) has designated specific expenses as not eligible for HSA:
- Childcare services or babysitting
- Illegal substances, such as medical marijuana or controlled drugs
- Cosmetic surgeries
- Dance lessons
- Diaper services
- Electrolysis
- Funeral costs
- Hair transplants
- Health club memberships
- Household help
- Insurance premiums
- Maternity clothing
- Medicines brought in from outside the U.S.
- Over-the-counter drugs, except for insulin
- Nutritional supplements
- Personal care items like toothpaste and toothbrushes
- Swimming lessons
- Teeth whitening
- Veterinary treatments
- Weight loss programs, unless related to specific diseases
Online retailers specializing in HSA-eligible products can help you determine the coverage of a certain medical item by checking their databases. You are not obligated to buy HSA-qualified goods from a specific provider.
Reimbursement terms
HSA reimbursement terms
You can either pay for qualifying expenses yourself and claim reimbursement or use an HSA debit card for eligible expenses.
Using a debit card may be more convenient, but not all HSA accounts come with this option, and not all eligible medical services can be paid using a debit card. If you want to be reimbursed for your expenses, you must submit your receipts prior to receiving reimbursement.
HSA guidelines after age 65
Once you reach age 65, you can withdraw money from your HSA for whatever reason without a penalty. If you withdraw money from your HSA after age 65 for reasons other than to pay for a qualifying medical or dental service, you are liable for taxation on the distribution at your regular income tax rate. In other words, the distribution is treated the same as a withdrawal from a traditional IRA or 401(k).
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Starting an HSA
Starting an HSA
Despite the complexities of understanding HSAs, setting up an HSA is a straightforward process. Most HSAs are employer-sponsored, but you can also open an HSA with various financial institutions.
Many employers offering qualifying high-deductible health plans also offer HSAs. To enroll, simply complete the required paperwork and arrange to have your HSA contributions deducted from your paycheck. Allocate the funds in your HSA by deciding on your investment strategy, just as you would with any retirement savings account.
While you are allowed to maintain multiple HSAs if you choose, the annual contribution limits set by the IRS apply to all of your accounts combined.
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After reaching the age of 65, you can withdraw money from your HSA for any purpose without incurring a penalty, but the distribution will be subject to regular income tax. To contribute to an HSA, you need to have a high-deductible health plan (HDHP), meet certain eligibility requirements, and contribute within the annual contribution limit set by the Internal Revenue Service. These limits vary based on self-only or family coverage and if the account holder is 55 or older.
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