March 2025 – HEALTH SAVINGS ACCOUNTS (HSAs)

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Health Savings Accounts (HSAs)

 

OVERVIEW

 

One of the most important financial discussions to have is around medical expenses and how to save for them while also generating a tax benefit. An option that is available for individuals to explore is a Health Savings Account (HSA). HSAs are commonly provided by employers, but an individual can also open one themselves if they are enrolled in a certain type of health insurance plan. HSAs provide a way for taxpayers to both save for medical expenses and receive a potential tax benefit.

 

 

What is a Health Savings Account (HSA)?

 

A health savings account (HSA) is a tax-exempt savings account that taxpayers and employers can contribute to. An HSA is the ultimate “rainy day” fund for medical expenses. When taxpayers have qualified medical expenses that are not being reimbursed to them, they can draw from their HSA account to cover their medical expenses. Qualified medical expenses are out-of-pocket medical costs, and generally match the requirements outlined in IRS Publication 502 Medical and Dental Expenses.

 

Qualified medical expenses include (but are not limited to) the following out-of-pocket items:

·     Insurance Premiums

·     Dental Treatments

·     Medications

·     Doctor Visits

·      Medical Treatments

·      Long-Term Care Costs

 

Who is eligible for an HSA account?

 

·     Taxpayers who are covered under a high deductible health plan.

·     A high deductible health plan is a health plan with a higher annual deductible that has a maximum limit on the amount of annual deductible and out-of-pocket medial expenses that you must pay for covered expenses.

·     Taxpayers with no other health coverage, unless that coverage includes the following:

·     Liabilities incurred under worker’s compensations laws, tort liabilities, or liabilities related to ownership or use of property.

·     A specific disease or illness

·     A fixed amount of hospitalization per day

·     Items such as: accidents, disability, dental care, vision care, long-term care, and telehealth and other remote care.

·     Taxpayers not enrolled in Medicare.

·     Taxpayers not claimed as a dependent on someone else’s tax return.

 

What are the benefits of having an HSA?

 

1. Tax savings: Taxpayers can reduce their taxable income, avoid FICA taxes, and enjoy tax-free growth and withdrawals for their unreimbursed qualified medical expenses.

2. Ability to cover some expenses that insurance doesn’t: Taxpayers can use HSA funds to pay for out-of-pocket costs their health plans do not cover.

3. Ability to have others contribute to the taxpayer’s account: Taxpayers can receive contributions from their employers, family members, or anyone else.

4. Portability of the account: HSA contributions do not expire and taxpayers can keep their HSA accounts even if they later change jobs or health plans.

 

Note: After an individual turns 65, money can be withdrawn from an HSA for any reason without incurring a penalty. However, you are still subject to normal income tax on any non-qualified withdrawals.

 

How do the HSA contributions lower taxable income on the tax return?

 

·     Contributions that an individual, a partnership, or S corporation made during the year are subtracted from taxable income on the individual’s tax return. However, any contributions made by an employer (partnerships and S corporations are not considered employers) are not included in income on the W-2 and therefore have already been deducted from taxable income.

·     Any contributions that are greater than the yearly contribution limit (this changes every year) are considered to be excess contributions and cannot be deducted.

 

Note: The penalty for non-qualified withdrawals is 20% and the non-qualified withdrawal will also be treated as taxable income and subject to income tax.

 

HSA Contribution Limits for 2024 and 2025 

 

Coverage Type 2024 Limit 2025 Limit
Self-Only Coverage $4,150 $4,300
Family Coverage $8,300 $8,550
Catch-Up Contribution (for age 55+) $1,000 $1,000

 

Note: Individuals who are 55 or older can contribute an additional $1,000 known as catch-up contributions.

 

An HSA is a noteworthy option for taxpayers who have high deductible health plans, taxpayers who need a tax benefit, or taxpayers who are planning for their retirement. Opening an HSA account and contributing to it is a productive way to save for medical expenses while also generating a tax benefit.

 

If you have any questions or if you are interested in exploring the potential of an HSA, please feel free to reach out to us and we will be happy to assist you.