Understanding Health Savings Accounts (HSAs): FAQs and Benefits

Frequently Asked Questions About Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer U.S. taxpayers enrolled in High-deductible Health Plans (HDHPs) a beneficial way to save for healthcare expenses. They provide a triple tax benefit: contributions are tax-deductible, funds grow without tax, and withdrawals for qualified medical expenses are tax-free. This setup ensures that money saved in an HSA isn't subject to federal income taxes, helping individuals save more effectively and lower their healthcare costs in the long run.

HSAs are incredibly flexible and versatile. You can use the funds to pay for a wide range of qualified medical expenses at any time without incurring federal tax liabilities or penalties. Additionally, you can invest your HSA funds, enabling your balance to grow over time. Unlike Flexible Spending Accounts (FSAs), unused funds in your HSA roll over year to year, providing a long-term savings solution for future healthcare needs.

This blog will address some of the most frequently asked questions about Health Savings Accounts (HSAs) to help you better understand how they work, their benefits, and how to make the most of this valuable financial tool.

The Benefits of Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs)

Health Savings Accounts (HSAs) are tax-advantaged savings accounts that cover out-of-pocket medical costs. Individuals must meet specific eligibility criteria to contribute to an HSA or have contributions made on their behalf, such as enrolling in a High-deductible Health Plan (HDHP).

HDHPs and HSAs offer several appealing benefits, such as:

• Tax Advantages:HSA contributions are nontaxable, the interest on HSA funds accumulates tax-free, and withdrawals for qualified medical expenses are not taxed.
• No Expiration on Funds: HSA funds do not have a usage deadline. Any unused money rolls over year to year without forfeiture.
• Personal Ownership: HSAs are individually owned, so the account remains with the individual even if they change jobs or retire. Individuals are responsible for managing and utilizing their HSA funds.
• Lower Monthly Premiums: High-deductible Health Plans (HDHPs) generally offer lower monthly premiums, which can help decrease healthcare costs. These plans often cover preventive care at no additional cost, and individuals can use HSA funds to pay for out-of-pocket medical expenses until they reach the deductible.
• Employer-Sponsored HDHPs and HSAs: Employers that offer HDHPs often face questions about HSAs. This FAQ section addresses common concerns and provides clear, concise answers to help employers and employees navigate the benefits and responsibilities associated with HSAs.

Top Common Questions About Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) are a practical way for individuals with high-deductible health plans (HDHPs) to save on medical expenses while benefiting from tax advantages. If you are eligible, you can contribute pre-tax dollars to an HSA, use the funds for qualified medical expenses, and enjoy tax-free growth on your savings.

To help you understand HSAs better, we have answered common questions about these accounts. These answers will explain eligibility, tax benefits, fund usage, and more, giving you the straightforward information you need to maximize your HSA.

HSA Eligibility

Q1: Who Is Eligible To Open and Contribute to a Health Savings Account (HSA)?

A: To qualify for a Health Savings Account (HSA), you must meet specific criteria:

• You must be covered by a High-deductible Health Plan (HDHP).
• With limited exceptions, you cannot have other health coverage that is not an HDHP.
• You must not be enrolled in Medicare.
• You must not be eligible to be claimed as a dependent on another person's tax return.

Your eligibility for HSA contributions is typically assessed monthly, starting from the first day of each month. Contributions can only be made for months during which you meet all these eligibility requirements.

Q2: Are Employers Responsible for Determining if Employees Are HSA-Eligible?

A2: Employers are primarily responsible for confirming whether employees are covered under a High-deductible Health Plan (HDHP) or any other low-deductible health plan sponsored by the employer, such as Health Flexible Spending Accounts (FSAs) or Health Reimbursement Arrangements (HRAs). However, when an employer makes a tax-free contribution to an employee's HSA, they should reasonably believe that the contribution qualifies for exclusion from the employee's income. The ultimate responsibility for determining eligibility for HSA contributions lies with the employee, not the employer.

Q3: Can an Employee Contribute to an HSA if a Health FSA or HRA Covers Them?

A3: No, individuals covered by general-purpose health Flexible Spending Accounts (FSAs) or Health Reimbursement Arrangements (HRAs) are not eligible to contribute to an HSA. A general-purpose health FSA or HRA reimburses eligible medical expenses below the deductible of a High Deductible Health Plan (HDHP). This makes individuals ineligible for HSA contributions, whether they are employees or dependents whose medical expenses are covered.

Q4: Are There Special Types of Health FSAs or HRAs Compatible With HSAs?

A4: While typical general-purpose health FSAs or HRAs can disqualify individuals from HSA eligibility, specific designs of health FSAs or HRAs can maintain HSA eligibility. These include limited-purpose health FSAs or HRAs that exclusively cover dental, vision, or preventive care expenses and post-deductible health FSAs or HRAs that cover medical expenses incurred after meeting the minimum annual deductible of the HDHP.

Q5: If an Employee With Coverage Under a Health FSA Changes to an HDHP/HSA for the Upcoming Plan Year, Will the Health FSA’s Grace Period (or Carryover Feature) Impact Their HSA Eligibility?

A5: An individual's eligibility for an HSA may be affected by a grace period or carryover feature in a health FSA. If a health FSA includes a grace period, the employee can only contribute to an HSA if their FSA balance is zero at the end of the plan year. Similarly, if a health FSA offers a carryover option, the individual will be ineligible to contribute to an HSA in the following plan year unless they decline or waive the carryover or if the carryover is to an HSA-compatible health FSA (such as a limited-purpose FSA or post-deductible FSA).

Q6: Will an Employer-Sponsored Wellness Program or Employee Assistance Program (EAP) Impact Employees’ HSA Eligibility?

A6: An employer-sponsored wellness program or Employee Assistance Program (EAP) will not affect an employee's eligibility to contribute to a Health Savings Account (HSA) unless the program offers significant benefits specifically for medical care or treatment. Programs focused on health screenings, preventive care services, education, or fitness improvement typically do not impact HSA eligibility. For instance, a wellness program providing educational workshops and fitness resources to enhance employee health and prevent illnesses does not affect HSA eligibility. Similarly, an EAP offering counseling services to address personal issues affecting job performance and referrals to external resources for further assistance also does not impact an individual's eligibility to contribute to an HSA.

High Deductible Health Plans (HDHP)

Q7: What Makes a Health Plan an HDHP?

A7: An HDHP, or High-deductible Health Plan, provides substantial coverage while meeting specific criteria for minimum deductibles and maximum out-of-pocket expenses. HDHPs can be insured, self-funded, or level-funded. In addition to covering preventive care, an HDHP generally begins providing benefits once the annual minimum deductible is reached. Effective January 1, 2024, HDHPs will have deductible and out-of-pocket limits as follows:

• Minimum Deductible: $1,600 for individual coverage and $3,200 for family coverage ($1,650 and $3,300 respectively starting in 2025).
• Out-of-pocket Maximum:$8,050 for individual coverage and $16,100 for family coverage ($8,300 and $16,600 respectively starting in 2025).

Q8: How Do the HDHP Cost-Sharing Limits Apply to Non-Calendar-Year Plans?

A8: The minimum deductible and out-of-pocket maximum limits for HDHPs are annually adjusted to account for increases in the cost of living. The IRS publishes these adjustments by June 1 each year, taking effect on January 1 of the following year. For HDHPs with non-calendar-year plans, these adjusted limits can be applied for the entire plan year starting from the calendar year in which the HDHP's plan year begins.

Q9: Can an HDHP Have an Embedded Deductible for Family Coverage?

A9: An individual health insurance plan featuring an embedded deductible covers claims for an individual once they meet the specified individual deductible, even if the entire family has yet to reach the family deductible threshold. However, if the embedded deductible is below the required minimum deductible for family coverage, the plan does not qualify as an HDHP. For plan years starting in 2024, an HDHP's embedded deductible must be at least $3,200 ($3,300 for plan years beginning in 2025).

Q10: If an Individual Switches From Self-Only to Family HDHP Coverage During the Plan Year, Can They Receive Credit Toward Their Deductible?

A10: If an individual transitions from self-only HDHP coverage to family HDHP coverage within the plan year, the HDHP can consider the expenses accrued by the individual during the period when they had self-only coverage. This adjustment does not impact the HDHP's status.

Q11: If an Employer Changes Health Plans During the Plan Year, Can Participants Receive Credit Toward The New Plan’s Deductible for Expenses Incurred Under the Prior Coverage?

A11: If an employer changes health plans midyear, and the period for satisfying the deductible is 12 months or less, the new health plan qualifies as an HDHP. This is true even if the new plan credits expenses incurred but not reimbursed during the previous health plan's short plan year. This rule applies regardless of whether the prior plan was an HDHP.

Q12: What Is the Deductible Exception for Preventive Care?

A12: Apart from preventive care, an HDHP only covers benefits once the minimum annual deductible is met. Preventive care encompasses various recommended items and services, such as periodic health exams, routine prenatal and well-child care, immunizations for children and adults, screening tests, obesity weight loss programs, tobacco cessation programs, care for certain chronic conditions and insulin products. Preventive care generally excludes services to treat existing illnesses, injuries, or conditions. Under the Affordable Care Act (ACA), nearly all health plans must cover recommended preventive care without imposing cost-sharing, including deductibles, copayments, or coinsurance.

HSA Contributions

Q13: How Much Can Be Contributed to an Individual’s HSA Each Year?

A13: Each month an individual qualifies for an HSA, they can contribute one-twelfth of the maximum annual contribution limit. If an individual remains eligible for HSA contributions throughout the calendar year, they can contribute up to the maximum allowable amount for that year. All contributions to an HSA, whether made by the individual or on their behalf, are considered towards the maximum contribution limit. For 2024, the maximum contribution limit is $4,150 for individuals with self-only coverage and $8,300 for individuals with family coverage. For 2025, these limits increase to $4,300 and $8,550, respectively. Individuals aged 55 or older can make an additional catch-up contribution of up to $1,000 annually by the end of the tax year.

Q14: What Is the Full-Contribution Rule for Midyear Enrollees?

A14: Under the full-contribution rule, if an individual becomes covered under an HDHP during a month other than January and remains HSA-eligible on December 1 of that year, they are treated as HSA-eligible for the entire calendar year. The individual is considered to have the same HDHP coverage (self-only or family) as on the first day of the last month of the year. For example, if an individual first becomes HSA-eligible on October 1, 2024, and has family HDHP coverage on December 31, 2024, they are treated as having had family HDHP coverage for all 12 months of 2024 and can contribute up to $8,300 to their HSA. The full-contribution rule applies regardless of whether the individual was eligible for the entire year, had HDHP coverage for the entire year, or had disqualifying non-HDHP coverage for part of the year. However, an individual who relies on this special rule must generally remain HSA-eligible during a 13-month testing period, with exceptions for death and disability.

Q15: Who Is Eligible for Catch-Up Contributions?

A15: Individuals aged 55 or older by the end of the tax year can make additional HSA contributions, known as "catch-up contributions," with a maximum annual limit of $1,000. Similar to the general HSA contribution rules, the catch-up contribution limit depends on the individual's monthly eligibility. This rule also applies to catch-up contributions. If an individual turns 55 after January 1st of a given year, their catch-up contribution limit for that year is not reduced. For instance, if someone is eligible for HSA contributions throughout 2024 and turns 55 on December 1, 2024, they can make a full $1,000 catch-up contribution for 2024.

Q16: Are There Any Special HSA Contribution Rules for Spouses?

A16: Yes, there are special contribution rules for spouses regarding HSAs. If either spouse has family HDHP (High-deductible Health Plan) coverage, both spouses are considered to have family coverage. If both spouses are eligible for HSAs, their combined contribution limit is a joint limit, typically divided equally unless they agree otherwise. This suggests their total contribution can be, at most, the annual maximum limit for individuals with family HDHP coverage. These rules apply even if one spouse has family HDHP coverage and the other has self-only coverage or if each spouse has family HDHP coverage that does not cover the other. However, this joint contribution limit rule does not extend to catch-up contributions. If both spouses are over age 55, they may each make an additional catch-up contribution to their respective HSAs.

Q17: Do Individuals Need To Stop Making HSA Contributions Before Applying for Medicare?

A17: A Medicare-eligible individual who hasn't enrolled in Medicare Part A, Part B, Part D, or any other Medicare benefit can continue making HSA contributions. However, the IRS advises caution, as individuals may need to stop HSA contributions before applying for Medicare. An individual's Medicare coverage typically begins six months before their Medicare application date, starting no earlier than the month they turn 65, which is when they become eligible for Medicare. During this retroactive coverage period, contributions to an HSA are not allowed.

Q18: Can Employees Make Pre-Tax Contributions to Their HSAs?

Yes, employees can make pre-tax contributions to their HSAs if their employer has a Section 125 cafeteria plan that permits HSA contributions. Alternatively, employees can make after-tax HSA contributions outside of a cafeteria plan, which would be treated as taxable income subject to withholding by the employer. Employees can then claim an above-the-line deduction on their tax returns for these after-tax HSA contributions.

Q19: Which Individuals Are Ineligible for Pre-Tax HSA Contributions?

A19: Business owners not classified as employees are ineligible to make pre-tax contributions to an HSA through a cafeteria plan. This group includes partners in a partnership, shareholders owning more than 2% in an S corporation, sole proprietors, and other self-employed individuals.

Q20: Can Employees Change Their Pre-Tax HSA Contributions During a Year?

A20: An employee who chooses to make pre-tax HSA contributions can initiate, stop, increase, or decrease their contributions at any point during the year, provided that the change takes effect moving forward. Employers typically establish deadlines for modifying contributions throughout the year to coincide with their payroll processes. To comply with HSA eligibility regulations, changes in HSA elections must be permitted at least monthly and upon loss of HSA eligibility.

Q21: Can Employers Contribute to Their Employees’ HSAs?

A21: Employers can make HSA contributions for their eligible employees, and these contributions are excluded from the employee's income for tax and withholding purposes. All contributions made by or on behalf of an individual, including those made by the employer, are combined to determine if they meet the maximum HSA contribution limit allowed.

Q22: Can Employers Vary Their HSA Contributions for Different Groups of Employees?

A22: Employers can adjust their HSA contributions across different employee groups, provided they adhere to the nondiscrimination tests applicable to cafeteria plans or HSA comparability rules. Under Section 125 cafeteria plans, when employees are permitted to make HSA contributions, employer contributions must comply with nondiscrimination tests to prevent favoritism towards highly compensated employees. If an employer does not offer pre-tax HSA contributions through a cafeteria plan, they must ensure that contributions to HSAs are comparable among all eligible employees. Comparable employees include those within the same employment category (current full-time, part-time, or former employees) who share the same type of HDHP coverage. Contributions are typically considered comparable if they are of an equal dollar amount or percentage relative to the HDHP deductible.

Q23: When Should Employers Make Their Contributions to Eligible Employees’ HSAs?

A23: Employers can contribute to their employees' HSAs anytime during the year. The deadline for these contributions is typically aligned with the HSA owner's tax return deadline, which is April 15 of the following calendar year, without extensions. Employer contributions can be made as lump-sum payments or at regular intervals, such as per pay period or monthly. Providing a lump sum at the beginning of the year allows employees immediate access to their HSA funds. However, this approach could pose tax issues if employees do not maintain HSA eligibility throughout the year. Additionally, once an employer contributes to an HSA, the contribution cannot be reclaimed, even if the employee leaves the company. Many employers opt for periodic contributions throughout the year to mitigate these risks.

Q24: How Quickly Must Pre-Tax Salary Contributions Be Sent to Employee’s HSAs?

A24: To adhere to federal tax regulations, employees' HSA contributions must be promptly forwarded to their designated HSA trustee or custodian.

Q25: Can an Employer Recoup Mistaken Contributions?

A25: An individual’s HSA balance is typically nonforfeitable, ensuring that contributions made by an employer become the property of the employee and cannot be reclaimed. However, there are specific circumstances under which an employer may recover contributions:

• If the employee was never eligible for HSA contributions.
• If contributions exceed the maximum annual limit due to an error.
• If there is clear documentary evidence of contributions made due to an administrative or process error.

In such cases, the employer should contact the HSA vendor to request the return of excess or mistaken contributions. Employers need to maintain documentation supporting their claim of an erroneous contribution.

Q26: How Are Employer HSA Contributions Reported for Tax Purposes?

A26: HSA contributions for each employee who receives them must be reported on Form W-2. Employers must include any pre-tax contributions employees make to their HSAs through the employer’s cafeteria plan. These contributions are considered nontaxable wages and must be entered in Box 12 of Form W-2 with the W code.

Q27: What if an Employee Exceeds Their HSA Contribution Limit for a Year?

A27: HSA contributions that exceed an individual’s limit or are made by someone not eligible for an HSA are called "excess contributions." The HSA owner cannot deduct these excess contributions. Employer contributions that surpass the limits, including employee pre-tax contributions, are added to the employee's taxable income. A 6% excise tax also applies to all excess contributions the HSA owner makes.

To avoid the 6% excise tax, the HSA owner must withdraw excess contributions by the tax filing deadline, including extensions, for the taxable year. Withdrawn excess contributions and earnings must be included in "other income" on the tax return without claiming a tax exclusion. This excise tax is cumulative and continues each year until corrective action is taken. Each year, the HSA owner must pay excise tax on all excess contributions in the HSA. However, if contributions in any year are below the maximum limit, the excise tax amount is reduced for that year and subsequent years by the difference between the maximum limit and the actual contributions.

Using HSA Funds

Q28: What Are the Tax Rules for Using HSA Funds?

A28: HSA funds can be tax-free for qualified medical expenses that occur after the HSA is established and are not reimbursed by another source. If HSA funds are used for non-qualified medical expenses, they are taxable income for the HSA owner and may be subject to a 20% penalty unless the HSA owner is over 65, disabled, or deceased

Q29: What Are Qualified Medical Expenses?

A29: For HSA purposes, qualified medical expenses generally include costs outlined in IRS Publication 502 to alleviate or prevent physical or mental disabilities or illnesses. These expenses do not cover treatments solely for general health benefits. Business health insurance premiums are typically not eligible as qualified medical expenses for HSAs, except in specific circumstances. However, HSA funds can be tax-free to purchase over-the-counter medicines and drugs.

Q30: Can an HSA Be Used To Pay for Insurance Premiums?

A30: Insurance premiums generally do not qualify as medical expenses for HSAs. However, HSA funds can be used tax-free to pay premiums under specific circumstances:

• Long-term care coverage
• Health coverage for an HSA owner who is age 65 or older
• Health coverage during periods of continuation coverage (e.g., under COBRA)
• Health coverage during periods when an individual is receiving unemployment compensation

Q31: Whose Medical Expenses Can Be Reimbursed by an HSA?

A31: HSA funds can be tax-free to cover qualified medical expenses for the HSA owner, their spouse, and tax dependents, including dependent children up to age 19 (or 24 for full-time students). Eligibility criteria for making HSA contributions do not apply to receive tax-free distributions from HSAs. Additionally, spouses and dependents do not need to meet HSA eligibility requirements to have their qualifying medical expenses reimbursed tax-free.

Q32: Is There a Deadline for Using HSA Dollars?

A32: There is no deadline by which individuals must use their HSA funds. Unused funds remain in the HSA from year to year and can be used for qualified medical expenses in the future. HSA owners have complete discretion over how and when they use these funds.

Q33: Can HSAs Be Used To Pay for Weight Loss Programs or Drugs on a Tax-Free Basis?

A33: Weight loss programs and drugs are not considered qualified medical expenses if they aim solely to improve appearance, general health, or well-being. However, if weight loss is prescribed as a treatment for a specific disease diagnosed by a physician (such as obesity, diabetes, hypertension, or heart disease), these costs may qualify as reimbursable medical expenses through an HSA on a tax-free basis.

Specifically, qualified medical expenses may include prescribed weight loss drugs for a medical condition and weight loss counseling or participation in a weight loss group when recommended by a physician to treat a medical condition. Expenses like gym membership dues for health clubs or spas are generally not considered qualified medical expenses. However, separate fees charged for weight loss activities may qualify if prescribed as a treatment for a specific diagnosed disease by a physician.

Q34: Can an HSA Be Used for Personal Health and Wellness Expenses on a Tax-Free Basis?

A34: HSAs cannot be used to pay for personal health and wellness expenses tax-free. According to the IRS, expenses that only benefit general health are not considered qualified medical expenses except in minimal circumstances. Here are some examples:

• Nutritional counseling qualifies as a medical expense only if it treats a specific disease diagnosed by a physician, such as obesity or diabetes.
• Nutritional supplements are considered qualified medical expenses if a medical practitioner recommends them for the treatment of a diagnosed medical condition.
• The cost of weight-loss food or beverages qualifies as a medical expense only if it does not satisfy regular nutritional needs, alleviates or treats an illness, and is substantiated by a physician. The expense is limited to the amount that exceeds the cost of a product that satisfies everyday nutritional needs.
• Exercise for improving general health, such as swimming or dance lessons, is never considered a qualified medical expense, even if recommended by a doctor.

Q35: Is the Employer Involved With How Employees Use Their HSAs?

A35: Once the money is in an HSA, it belongs exclusively to the account owner, who has complete control over its spending. Employers can select the custodian or trustee to set up HSAs, but they must ensure employees can withdraw or transfer funds to another HSA. The custodian or trustee can impose reasonable administrative limits on distributions, like setting a minimum amount per withdrawal and a maximum number of monthly distributions.

Neither employers nor HSA custodians/trustees are obligated to verify if HSA withdrawals are for qualified medical expenses. The HSA owner is responsible for making this determination and maintaining documentation, such as receipts, for items and services paid for with HSA funds.

FAQs

Can HSA Funds Be Used for Non-Medical Expenses?

Yes, HSA funds can be used for non-medical expenses, but withdrawals before age 65 are subject to income tax and an additional 20% penalty. After turning 65, individuals can withdraw HSA funds for any purpose without penalty, but non-qualified withdrawals will still incur income tax.

Can HSA Funds Be Used to Pay for Health Insurance Premiums?

Generally, HSA funds cannot be used to pay for health insurance premiums except in specific situations. These exceptions include paying premiums for COBRA coverage, long-term care insurance, health insurance while receiving unemployment benefits, or Medicare premiums after age 65. For all other situations, using HSA funds for health insurance premiums is prohibited without incurring taxes and penalties.

What Happens to an HSA When the Account Holder Dies?

Upon the death of the HSA account holder, the account's funds can be transferred to a designated beneficiary. If the beneficiary is the account holder's spouse, the HSA can be treated as the spouse's own HSA, allowing continued tax-free growth and use for qualified medical expenses. If the beneficiary is not a spouse, the account ceases to be an HSA, and the funds will be subject to income tax. Any remaining balance is included in the deceased account holder's estate for tax purposes. Updating beneficiary designations is essential to ensure proper account handling upon death.

Can HSA Funds Be Used for Alternative Medicine Treatments?

HSA funds can be tax-free for qualified medical expenses related to alternative medicine if the treatment is prescribed by a licensed healthcare professional and aims to alleviate or treat a specific medical condition. Examples include acupuncture and chiropractic care as part of a prescribed treatment plan. However, treatment expenses primarily for general health, wellness, or personal preference are not eligible for medical expenses.

Are HSA Funds Available for Dental and Vision Expenses?

HSA funds can be tax-free for qualified dental and vision expenses. This includes costs for routine check-ups, cleanings, fillings, braces, eyeglasses, and contact lenses. To qualify, these expenses must meet the IRS's definition of qualified medical care. It’s essential to keep documentation for all costs to verify their eligibility for HSA reimbursement.