HSAs are accounts set up to pay for current and future qualified medical expenses of self, spouse and dependent(s) with a High-Deductible Health Plan (HDHP). They have triple tax advantages: tax-deductible contributions, tax-free growth, and non-taxable distributions for qualified expenses.
Basics
- HSAs are accounts set up to pay for current and future qualified medical expenses with a High-Deductible Health Plan (HDHP).
- They are individually owned accounts; individuals make decisions regarding participation, contributions, usage and distributions.
Eligibility
To qualify for an HSA contribution, an individual must meet the following requirements;
- Covered by a HDHP
- Not covered by other health insurance
- Not enrolled in Medicare
- Can’t be claimed as a dependent on someone else’s tax return
Spouses can establish their own HSAs assuming meeting eligibility requirements.
Children are not eligible for their own HSAs.
No minimum/maximum income limits
No earned income requirements
HDHP
Except for preventive care, a HDHP does not cover first dollar medical expenses (i.e., subject to the annual deductible & out-of-pocket expenses below). It is designed to cover catastrophic medical expenses; it provides for benefits such as hospitalization and outpatient care.
| Annual deductible & out-of-pocket expenses | Self-only (2025) | Family (2025) |
| Minimum annual deductible | 1,650 | 3,300 |
| Maximum annual deductible & out-of-pocket expenses | 8,300 | 16,600 |
Contribution
Contributions can be made by the individual, the employer or both.
The individual’s contributions are tax-deductible. Spouses can contribute on one’s behalf.
The employer’s contributions are not taxable to the employee.
| Annual contribution limits | Self-only (2025) | Family (2025) |
| Maximum contribution | 4,300 | 8,550 |
| Catch-up contribution at age 55 or older | 1,000/person | 1,000/person |
Distribution
Distributions for qualified medical expenses (below) of self, spouse and dependent(s) are not taxable.
Distributions for non-qualified expenses are taxable and subject to 20% penalty. No penalty applies for those who are disabled, at age 65 or older, or die.
Qualified expenses
Medical expenses incurred before establishing an HSA are not qualified medical expenses.
IRS filing requirements
- Receipt of Form 1099 SA from the HSA trustee
- Submission of Form 8889 (qualified medical expenses) as part of Federal income tax return
HSA upon death
When the HSA owner passes away, the beneficiary who is also the spouse becomes the owner. Otherwise, the HSA becomes part of the decedent’s estate and taxable.
Advantage
- No “use it or lose it” as is applicable to Flexible Spending Accounts (FSAs)
- Fully vested
- Tax-deductible contributions, tax-free growth, and non-taxable distributions for qualified expenses
- Portable
Disadvantage
- Not setting up an HSA after enrollment
- Not funding it adequately
For whom could an HSA be suitable?
- Those who are healthy with minimal medical care
- Those who are otherwise healthy but with well-managed illnesses
- Those who think their tax benefits, savings and investments outweigh higher deductibles