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Tuesday, March 5, 2024

What is a Health Savings Account (HSA)? HSA basic principles 2024

This article has been updated for tax years 2023 and 2024. A few years ago I switched from traditional PPO health insurance to one high deductible health plan (HDHP) that was linked to a health savings account (HSA) during my employer. open enrollment period of time. Why? I’m young, healthy, and I haven’t been to the doctor more than a few times in recent years (knock on wood). That’s why an HDHP offers me lower premiums than traditional health insurance.

That was a huge selling point, but the even bigger selling point of the HDHP was the access it allowed to the HSA it came with (which my employer contributed to). HSAs are an important part of HDHPs, so let’s take a deeper dive into what they are, how to use one, HSA contribution amounts, how to start a new HSA, and what medical expenses can be paid with an HSA .

What is an HSA?

Health savings accounts, also called HSAs, are tax-exempt accounts that allow you to contribute tax-deductible funds that you can use to pay for qualified medical expenses. Many HSAs come with a debit card that makes paying and accounting for medical expenses easy.

Different than at FSAs, you own the HSA and can take it with you when you leave your employer. And when you turn 65, you can use the HSA money not just for medical expenses, but for anything, without penalty. That’s why I think, aside from the matching, HSAs are the… best retirement account (even though they are not considered a retirement account).

HSAs are very similar to traditional IRAs or 401Ks in many ways:

  • you can make tax-deductible contributions through your employer, just like a 401k.
  • you can invest the money in the account.
  • there are annual maximum contributions.
  • your employer can contribute to the account.
  • the entire balance is carried over from one year to the next.

The main difference is that the bill can help you cover qualified medical expenses. Many HSAs come with a debit card that can help you cover these costs.

What costs does an HSA cover?

HSA qualified medical expenses

There are many medical expenses that you can cover with your HSA fund. Some of the most common are dental and doctor visits and procedures, flu shot, costs for prescription drugs or co-payments, laser eye surgery, eye exams, prescription glasses and contacts, chiropractor and contraception.

If you have a medical condition that requires special equipment or treatment, these costs are usually covered as well.

For a complete overview of which medical costs are covered by a health savings account, view my overview of HSA and FSA eligible qualified medical expenses And IRS Publication 502. For example, as a result of the CARES Act during the COVID-19 pandemic, over-the-counter medications, telehealth, and menstrual care products are now considered qualified medical expenses.

What expenses are not covered by an HSA?

Publication 502 also contains a list of items not covered. But one of the biggest expenses you may be wondering about is insurance premiums. Generally, you cannot use your HSA to cover insurance premiums. There are some exceptions:

  • COBRA premiums
  • Medicare
  • insurance premiums while you are unemployed

Aside from insurance premiums, if it’s not on Publication 502’s covered list, you can probably assume it’s not covered by an HSA.

Maximum HSA contribution limits

Like IRAs and 401Ks, HSAs have annual contribution limits that adjust each year for inflation.

Theirs maximum HSA contribution limits Are:

Maximum HSA contribution limits for 2023

The maximum HSA contribution amounts for 2023 are:

  • Individual subscription: $3,850 (+$200 compared to last year)
  • Family plan: $7,750 (+$450 compared to last year)

Please note: The maximum HSA contribution includes both employer and employee contributions.

Maximum HSA contribution limits for 2024

The maximum HSA contribution amounts for 2024 are:

  • Individual subscription: $4,150 (+$300 compared to last year)
  • Family plan: $8,300 (+$550 compared to last year)

Please note: The maximum HSA contribution includes both employer and employee contributions.

As with 401Ks, there is a catch-up contribution for those age 55 and older. The Amounts of the HSA catch-up contribution for 2023 and 2024 are $1,000 for individual plans and $1,000 per person ($2,000 total) for family plans if both individuals are 55 or older.

A major difference in HSA contribution maximums versus 401Ks is that any employer contributions must be subtracted from the maximum contribution (to determine how much you can contribute personally), while employer 401K contributions do not change the amount of personal contributions you can make) .

For example, if you have an individual plan and your employer contributes $1,000 to your HSA in 2024, the maximum amount you can contribute is $3,150 ($4,150 – $1,000), if you are under age 55 and not is eligible for the catch-up contribution.

When is the deadline for HSA contributions?

The HSA contribution deadline is the same date as the tax deadline. This means that you have approximately 3.5 additional months after the end of the calendar year to make retroactive HSA contributions.

Who is eligible for an HSA?

To be eligible to contribute to an HSA:

  • You must be insured for an HDHP on the first day of the month of the contribution.
  • You have no other health insurance (except vision, dental, disability, accident, long-term care).
  • You are not enrolled in Medicare.
  • You cannot be charged on someone else’s tax return.

What happens to your HSA if you change plans? Can you do an HSA Rollover?

When you leave your employer or end your participation in an HDHP, the HSA is yours. HSAs can be transferred from one HSA to another if you’re trying to consolidate, just like IRAs can. You cannot convert an HSA into an IRA or 401k. You can have one IRA to HSA transition but the rules make it quite restrictive.

Contributions to an HSA immediately belong to the participant, regardless of who contributed (you or employer).

If you return to a traditional insurance plan and stop using an HDHP, you can still use your HSA funds to cover qualified medical expenses.

HSA vs. FSA: What’s the difference?

If you’ve had an FSA in the past or are considering one, you’re probably wondering how FSAs differ from HSAs. There are a few important differences between HSAs and FSAs.

  • You own an HSA, your employer owns the FSA.
  • You can transfer all HSA funds from one year to the next FSA transfer rule is very limited.
  • You can invest money in an HSA, but not with an FSA.
  • The maximum contributions between the two differ, but HSA maximum contributions are generally higher than FSA maximum contributions.
  • Employers often offer HSA bonus incentives but I haven’t seen this with FSAs.

Considering all the benefits, you might be wondering if this is even possible transfer money from an FSA to HSA, which could also potentially help avoid the FSA’s ‘use it or lose it’ rules. Unfortunately, the Tax Authorities do not allow this.

Can you contribute to an HSA outside of payroll deductions for employers?

Yes, that’s possible contributing to an HSA outside of an employer. And the same tax-deductible benefits apply, but you can’t fully realize them until you’ve done your taxes for the year.

Can you preload your HSA contributions?

That’s possible, but the decision is whether or not frontload your HSA contributions at the beginning of the year has some nuances. If you have upcoming expenses and plan to keep your HDHP year-round, this may be worth it. Otherwise, it can be a mess to clean up to avoid taxes and penalties.

How can I open a new HSA? What is the best HSA account to transfer to?

HSA accounts cannot be found at any typical online broker (Fidelity has HSAs as an exception). I searched through hundreds of HSA accounts, fees, and investment options to compile a list the best HSA accounts. Check it out: It’s easy to transfer money from your current HSA provider (even if it’s through your current employer and you still have the HSA open with them). You can transfer money at any time. Not all HSAs are created equal, as you will find in that article.

Frequently Asked Questions – FAQs

How do HSAs differ from traditional IRAs or 401Ks?

HSAs offer tax benefits for medical expenses and flexibility, unlike traditional retirement accounts.

Can HSA funds be used for non-medical expenses after turning 65?

Yes, at 65, HSA funds can be used for any expenses without penalties.

What medical expenses are covered by an HSA?

Common covered expenses include doctor visits, prescription drugs, and certain medical procedures.

Are insurance premiums covered by an HSA?

Generally no, except for specific cases like COBRA premiums and Medicare.

What is the deadline for making HSA contributions?

The HSA contribution deadline aligns with the tax deadline, providing an additional 3.5 months after the calendar year.

Can you transfer funds from an FSA to an HSA?

Unfortunately, tax authorities do not permit the transfer of funds from an FSA to an HSA.

Learn more about health savings accounts

To get started, check with your employer as details about what they will contribute, HDHP premiums, and other factors may vary.

Also take a look IRS Publication 969 for more information about HSAs. Also, check out my previous HDHP post for tips on determining if an HDHP makes sense for you.

Do you have an HSA? How has it worked for you?

Sources & Idea Inspirations:

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