Health Savings Accounts (HSAs) are tax-advantaged savings accounts held by individuals to pay for eligible out-of-pocket healthcare expenses. An individual can also contribute to an HSA to pay for qualified medical expenses such as vision and dental. HSAs provide a triple advantage through pre-tax contributions, earnings from interest on the account, and qualified distributions that are exempt from federal income tax. HSAs can be a tax-exempt trust or custodial account held by the individual. Please be sure to consult your tax and legal advisors for questions or specific information on tax matters.
You must be enrolled in a High Deductible Health Plan (HDHP) to open and contribute to an HSA. Federal law includes strict guidelines for HSAs including HDHP cost sharing and annual limits on contributions. Contribution limits for 2023 are:
Maximum Contribution amount
- $3,850 – Individual
- $7,750 – Family
- $1,000 catch-up for age 55+
- $7,500 – Individual
- $15,000 – Family
Minimum Health Plan Deductible limit
- $1,500 – Individual
- $3,000 – Family
What are the potential benefits of an HSA for employees?
- Employee contributions are pre-tax (if made by salary deduction)
- Employees may also make individual contributions outside of salary reduction that are tax deductible.
- Employer contributions are excluded from gross income and are generally not subject to employment taxes.
- Interest or earnings on amounts in an HSA are not includable in gross income while held in the HSA.
- Tax-free distributions to pay for qualified medical expenses, and employees do not need to meet HSA eligibility criteria to receive a distribution.
- Amounts remaining in an HSA at the end of a year can be carried over from one year to the next.
- The employee is the owner of the account and can take it with them if they change jobs.
Who may participate in an HSA?
The IRS has strict guidelines regarding who is eligible to open and contribute to an HSA. Under the law, an eligible individual must be covered under an HDHP, not covered under any other health plan, not enrolled in Medicare, and not claimed as a dependent on any other individual’s tax return.
Who may contribute to an HSA?
Both the employee as well as the employer, and any other individuals including family members.
What distributions can be made from an HSA?
- Distributions used exclusively to pay for qualified medical expenses of the employee and their spouse and dependents are tax-free.
- Any distribution amount not used exclusively to pay for qualified medical expenses is included in the employee’s gross income and may be subject to an additional 20 percent tax.
- Employees who cover dependents to age 26 under their insurance may not use HSA funds for reimbursement on a tax-free basis for an adult child’s medical expenses, unless the adult child qualifies as a tax dependent of the employee.
- An employee may receive distributions from an HSA at any time for qualified medical expenses not reimbursed by their insurance; however, expenses incurred before an HSA is established are not considered qualified medical expenses.
What are qualified medical expenses for which HSA funds can be used?
- Expenses paid for “medical care” as defined in Internal Revenue Code Section 213(d).
- Premiums for qualified long-term care insurance subject to limits based on age and adjusted annually; healthcare continuation coverage (e.g., COBRA); healthcare coverage while on unemployment; or Medicare Part A, B, D and Medicare HMO and other healthcare coverage if the employee is 65 or older (does not include Medicare supplemental policy, such as Medigap).
IRS Publication 969, Health Savings Accounts and Other Tax-favored Health Plans