Health Savings Accounts (HSAs) can help offset some of the ever-escalating costs of healthcare. For those who qualify, HSAs provide a tax-advantaged way to save funds for future medical expenses. Here are the key tax benefits:

Contributions to an HSA are tax-deductible, subject to certain limits.
Contributions made by your employer are not taxable to you.
Earnings on HSA funds are tax-free.
Distributions used for qualified medical expenses are not taxed.
Eligibility: To qualify for an HSA, you must be covered by a “high deductible health plan” (as detailed below) and not have coverage that overlaps with the benefits of your high deductible plan. You can, however, have additional coverage for accidents, disability, dental, vision, or long-term care.

For 2024, a “high deductible health plan” is one with a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage. The 2024 limit on deductible contributions is $4,150 for self-only coverage and $8,300 for family coverage. Additionally, out-of-pocket expenses (excluding premiums) cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.

Individuals aged 55 or older by the end of the tax year can make additional “catch-up” contributions of up to $1,000 for 2024.

High deductible health plans do not include those covering primarily accidents, disability, dental, vision, long-term care, specific diseases, or fixed daily hospitalization amounts.

HSAs can be set up by or for any eligible individual.

Deduction Limits: You can deduct contributions up to the total of your monthly limits for the months you were eligible. For 2024, the monthly deduction limit for self-only coverage is $1/12 of $4,150, and for family coverage, it’s $1/12 of $8,300. Contributions are not restricted by the annual deductible amount.

If you are eligible for an HSA in the last month of the tax year, you are considered eligible for the entire year for contribution purposes. However, if you are enrolled in Medicare, you are no longer eligible to contribute to an HSA.

Contributions can be made even if the individual has no compensation or if contributions exceed compensation. Family members can also contribute on behalf of an eligible individual, with these contributions being deductible.

Additionally, you can transfer funds from an IRA to an HSA tax-free once, up to the maximum deductible contribution for your coverage type. This transfer is excluded from gross income and not subject to the early withdrawal penalty.

Employer Contributions: If your employer contributes to your HSA, these contributions are considered employer-provided medical coverage and are excluded from your gross income up to the deduction limits. These contributions are not subject to income tax withholding or FICA/FUTA. However, you cannot deduct employer contributions on your federal tax return.

Employers must make comparable contributions to all eligible employees’ HSAs. If not, they face a 35% tax on the total contributions made. Comparable contributions can be the same amount or percentage of the deductible limit and must be uniform across similar employee categories.

There is an exception for non-highly compensated employees, allowing larger contributions for them compared to highly compensated employees.

Employer contributions made through a cafeteria plan are also excluded from gross income and are not subject to comparability rules.

Earnings: HSAs are generally tax-exempt if properly managed, with no tax on earnings. However, exceeding contribution limits, failing to provide required reports, or engaging in prohibited transactions may trigger taxes.

Distributions: Withdrawals from an HSA for qualified medical expenses are tax-free. Non-qualified withdrawals are taxable and incur an additional 20% tax, unless made after age 65, or in cases of death or disability. Distributions exclusively for qualified medical expenses remain tax-free, even if the individual is no longer an HSA-eligible person, such as after turning 65 or acquiring Medicare.

Disclaimer: The information provided here is for general informational purposes only and should not be construed as legal or financial advice. Always consult with a qualified tax professional or advisor to discuss your specific situation and obtain advice tailored to your individual needs. The accuracy, completeness, and timeliness of the information cannot be guaranteed, and you should rely on professional guidance when making tax-related decisions.