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Health Savings Account (HSA) rules and limits include a maximum amount you can contribute to your HSA account for 2024 and 2025 and which types of health insurance plans qualify as a "high deductible health plan." If you can meet the requirements, consider signing up for an HSA plan through our list of the best HSA account providers.
Key Takeaways
- An HSA lets you set aside pre-tax income to cover healthcare costs if you have a qualifying high-deductible health plan.
- For the 2024 tax year, the maximum contribution amounts are $4,150 for individuals and $8,300 for family coverage.
- For the 2025 tax year, the maximum HSA contribution amounts are $4,300 for individual coverage and $8,550 for family coverage.
- If you are 55 or older, you can add up to $1,000 more as a catch-up contribution.
- With an HSA, any funds still in the plan at year's end can be rolled over indefinitely.
Who Can Open a Health Savings Account?
A Health Savings Account (HSA) can be used as a tax-advantaged savings tool or to pay medical bills. According to the federal guidelines, you can open and contribute to an HSA if you:
- Are covered under a qualifying high-deductible health plan (HDHP), which meets the minimum deductible and the maximum out-of-pocket threshold for the year
- Aren't covered by any other medical plan, such as a spouse's plan, Medicare, TRICARE or TRICARE for Life, claimed as a dependent on someone else's tax return
- Don't have any disqualifying alternative medical savings accounts, like a Flexible Spending Account or Health Reimbursement Account
Note
Veterans can use high-deductible health plans and HSAs for non-service-connected care.
What Qualifies as a High-Deductible Health Plan?
As its name implies, an HDHP is a healthcare plan that trades relatively low monthly premiums for relatively high deductibles. The HDHP must meet certain criteria to qualify for an HSA that can be opened in combination with it. In combination with a high-deductible health plan (HDHP), HSA funds can pay a wide variety of healthcare costs until you meet your plan's deductible and healthcare coverage kicks in.
The Internal Revenue Service (IRS) establishes guidelines annually, adjusting the figures for inflation. Here are the qualifying criteria for 2024:
| 2024 High-Deductible Health Plan Rules | ||
|---|---|---|
| Individuals 2024 | Families 2024 | |
| Minimum Deductible | $1,600 | $3,200 |
| Out-of-Pocket Maximum | $8,050 | $16,100 |
The out-of-pocket maximum. It can include deductibles, co-payments, and co-insurance. It does not include insurance premiums. The out-of-pocket maximum will not usually include out-of-network services.
How Does a Health Savings Account Work?
Contributions to an HSA are tax-deductible. For employer-sponsored plans, the contributions are deducted from paychecks. If you're self-employed, the deductions can be taken when your annual taxes are prepared.
Withdrawals from an HSA are tax-free provided the money is used to pay for qualified medical expenses. These expenses can include payments for dental and vision care, which some medical health insurance plans do not cover.
Most HSAs issue a debit card that can be used to pay for prescription medications and other eligible expenses. If you wait for a bill to come in the mail, you can make a payment over the phone using your debit card.
No Use-It-or-Lose-It Worries
Any money that is in your account at the end of the year remains in your account to pay for future qualified medical expenses. End-of-year balances are carried over indefinitely.
The account and its funds belong to you, and you retain ownership even if you change health insurance plans, change jobs, or retire. While it's in the account, the money grows tax-free.
How Much Can I Contribute to a HSA?
The IRS sets limits that determine the combined amount that you, your employer, and any other person can contribute to your HSA for 2024 and 2025:
| 2024 | 2025 | |
|---|---|---|
| Maximum Individual Contribution | $4,150 | $4,300 |
| Maximum Family Contribution | $8,300 | $8,550 |
| Catch-Up Contribution | $1,000 | $1,000 |
If you are 55 or older, you can add up to $1,000 more yearly as a "catch-up" contribution. So, instead of being limited to a contribution of $4,150 for 2024, you're limited to a contribution of $5,150.
How Can I Use HSA Money?
An HSA can help cover expenses not covered by your health insurance plan. For example, if your medical plan doesn't cover dental or vision care, HSA funds can still be used for those bills.
However, HSA funds can also help pay for any qualified medical expenses incurred by you, your spouse, and your dependents. The IRS establishes what is and is not a qualified medical expense, as detailed in IRS Publication 502, Medical and Dental Expenses.
Qualified expenses include nearly any medical cost, including payments for diagnostics, cures, mitigations, treatments, and prescribed preventative medications.
HSA can also be used to make payments that count toward your deductible.
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Investopedia / Ellen Lindner
How You Cannot Use HSA Money
There are a few things that an HSA cannot be used for. You can't use it to pay insurance premiums. Other ineligible expenses include over-the-counter items like toothpaste, toiletries, and cosmetics, as well as most cosmetic surgeries. A vacation to a healthier climate would also not qualify.
If you're 64 or younger and withdraw funds for a non-qualified expense, you'll owe income taxes on the money, plus a 20% penalty. If you're 65 or over or are disabled, you'll still owe taxes on the amount but will be spared the penalty.
How Can I Set Up a HSA?
You first need to enroll in an HDHP. If you take that step through your employer's human resources department, it should be able to advise you on creating your HSA. Most employer-sponsored HDHPs have an associated HSA provider with which you can work.
If an HSA is not included with your HDHP, you can set it up independently. Banks, credit unions, and brokerages all offer HSAs.
Each HSA provider can create its own terms for the funds. HSAs, through a brokerage, even allow you to invest your contributions in stocks, bonds, or other funds. Bank HSAs usually offer an optimal interest rate.
Once you select a provider, the enrollment process is fairly straightforward: You must complete an application with information on your HDHP. Once your account is approved, you can fund it and use it for qualified expenses.
HSAs as Savings and Investing Tools
An HSA can be used as a tax-sheltered investment vehicle. For savvy investors, they create an opportunity to accumulate capital gains that can be withdrawn tax-free for medical expenses.
Most HSA account holders will want to be somewhat conservative in investing this money since it is intended for necessary medical costs. This can limit the investments an account holder may wish to make with their HSA contributions to low-risk investments.
The type of account opened will dictate the type of investments available. Plans provided through banks usually offer only high-yield savings deposits, while brokers offer much more.
Note
HSAs were established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act.
Who Benefits Most From a HSA?
High-deductible health plans (HDHPs) make sense for young, relatively healthy people with minimal annual healthcare needs. Plan owners can potentially save indefinitely through an HSA for future emergencies that may require a high deductible payment or for health care needs in retirement.
For high-income earners and those approaching retirement, the HSA can build a medical emergency fund while saving in an alternative retirement vehicle. High-earners choosing an HDHP can use an HSA to save up to $8,550 annually in a tax-sheltered account.
Frequently Asked Questions (FAQs)
Can I Get an HSA If I Have a Low-Deductible Plan?
No. Only people who have high-deductible health insurance plans can open a Health Savings Account. Some employers offer a similar plan called a flexible spending account (FSA). Employees can choose to divert up to the annual limit, tax-free, into an account to pay uncovered medical expenses. The FSA money in your account doesn't roll over from year to year. You use it or lose it.
What Are the Benefits of a Health Savings Account?
A Health Savings Account helps people pay for expected and unexpected expenses not covered by a high-deductible health insurance plan. Moreover, the money you pay into the account is tax-sheltered and works somewhat like a 401(k) plan or IRA. The money accumulates every year without incurring taxes. If you don't use all of the money in your account, it can act as a retirement nest egg for when your healthcare expenses are higher.
What Are the Downsides of a Health Savings Account?
The money deducted from your paycheck and paid into a Health Savings Account can only be used for medical expenses. If you take the money out for any other reason, you'll owe income taxes plus a 20% penalty unless you're over 65.
The Bottom Line
If you have a high-deductible health insurance plan, having a Health Savings Account can give you some peace of mind regarding unexpected (and uncovered) medical expenses. Better yet, any money in your account that you don't have to use will continue to accumulate tax-free over time. You can also withdraw tax-free as long as you're withdrawing for qualifying medical expenses.
On the other hand, remember that a high-deductible health plan might not be the right choice if you expect to incur substantial health costs soon. Even though you will pay lower premiums with the HDHP, it could be difficult—even with money in an HSA—to come up with the immediate cash to meet the deductible for a costly medical procedure.