Health Savings Accounts (HSAs) give individuals with High-Deductible Health Plans (HDHPs) the ability to save tax-free money for qualified medical expenses. These accounts provide a powerful way to manage healthcare costs while offering significant tax advantages that benefit individuals and families.
HSAs allow participants to build a savings cushion for current and future healthcare needs. Funds in HSAs roll over annually, ensuring no money is lost and enabling participants to grow their savings over time.
Definition and Eligibility Criteria
HSAs work as tax-advantaged accounts that individuals use to cover various medical expenses, such as dental care, prescription medications, vision care, X-rays, bandages, and co-pays.
Contributions to HSAs lower taxable income, allowing individuals to save on taxes while allocating funds for healthcare. Funds in HSAs grow tax-free through interest or investment returns. Withdrawals for qualified medical expenses also remain tax-free, creating a triple-tax advantage.
Triple-Tax Advantage:
- Contributions to HSAs reduce taxable income through payroll deductions or individual deposits.
- Funds in HSAs grow tax-free through investments and interest.
- Withdrawals for qualified medical expenses incur no tax.
Eligibility Criteria:
- Enroll in a qualified HDHP.
- Avoid holding other conflicting health coverage.
- Avoid Medicare enrollment.
- Avoid being claimed as a dependent on someone else’s tax return.
Individuals open HSAs through financial institutions or employer-sponsored plans. Family members or others contribute on behalf of the account holder. Self-employed and unemployed individuals also participate if they maintain an HDHP and meet eligibility requirements.
Special Considerations for HSAs
HSAs pair with HDHPs, which offer lower monthly premiums in exchange for higher deductibles. Individuals use HSA funds to pay for medical expenses until they meet their deductible. Funds in HSAs roll over to the following year, enabling individuals to build long-term savings.
To qualify as an HSA-eligible HDHP in 2025:
- Minimum Deductibles:
- Self-Only Coverage: $1,650
- Family Coverage: $3,300
- Maximum Out-of-Pocket Costs:
- Self-Only Coverage: $8,300
- Family Coverage: $16,600
These requirements ensure HDHPs offer cost-effective healthcare coverage while enabling account holders to save tax-free funds through HSAs.
Tax Advantages and Contribution Limits
Tax Advantages:
- Contributions to HSAs lower taxable income, reducing immediate tax burdens.
- Funds in HSAs grow tax-free, allowing investments to compound without taxation.
- Withdrawals for qualified medical expenses remain tax-free, preserving the full value of funds.
2025 Contribution Limits:
- Self-Only Coverage: $4,300
- Family Coverage: $8,550
- Catch-Up Contributions: Individuals aged 55 or older contribute an additional $1,000.
Contribution Rules:
- Individuals make contributions in cash and follow IRS limits.
- Unused contributions roll over into the next year, building long-term savings.
- HSAs remain portable, staying with account holders regardless of job changes, retirement, or health plan switches.
Beneficiary Rules:
- Spouses inherit HSAs tax-free and use the funds under the same rules.
- Non-spouse beneficiaries pay income tax on the fair market value of the account, adjusted for any medical expenses paid from the account within one year of the account holder’s death.
Qualified Medical Expenses and Withdrawal Rules
HSA funds cover a wide range of qualified medical expenses, including:
- Co-pays
- Prescription drugs
- Dental services
- Vision care
- Deductibles
- Psychiatric treatments
Insurance Premium Exceptions:
HSAs typically do not cover insurance premiums, but exceptions exist:
- Medicare premiums or healthcare coverage for individuals aged 65 or older.
- COBRA continuation coverage for individuals transitioning between jobs.
- Coverage during unemployment.
- Long-term care insurance premiums are subject to annual IRS limits.
Non-Qualified Withdrawals:
Withdrawals for non-qualified expenses incur income tax and a 20% penalty if the account holder is under age 65. Individuals aged 65 or older avoid penalties but still pay income tax on non-qualified withdrawals.
Key Takeaways
Health Savings Accounts (HSAs) stand out as one of the most versatile tools for saving and investing. Individuals use HSAs to save pre-tax dollars for medical expenses while benefiting from unparalleled tax advantages. Participants maximize their financial health by contributing to HSAs, managing healthcare costs, and building long-term savings. By regularly contributing to an HSA, individuals unlock a tax-efficient strategy for covering medical expenses, preparing for retirement, and securing their financial future.