Health Savings Account – HSA

By: Dr K C Gupta

HEALTH SAVINGS ACCOUNTs (HSAs, 12/2003- ) are interesting alternatives to conventional employer group insurance. They have triple+ benefits: (1) Contributions are pre-tax or tax- deductible (itemized Schedule A not necessary); (2) account assets grow tax-free; (3) qualified withdrawals under age 65 are tax-free & without penalty; (3+) after the age 65, withdrawals for any purpose are without penalty but are taxable (& unlike the IRAs, there are no RMDs).

So, the HSAs can serve the dual purposes of qualified healthcare expenses & retirement
savings. Some go as far as to suggest the use of taxable funds for qualified expenses, if
possible, & let the HSAs build up for retirement. If needed, the past qualified expenses with receipts can be self-reimbursed anytime. The HSAs are most beneficial for younger people with lower medical expenses & higher incomes. State tax benefits for HSAs vary by states.

The HSAs are used in conjunction with high-deductible health insurance plans (HDHPs). Them HSAs are owned by persons/ employees & are portable. Any unspent amounts automatically rollover to the next year. Besides the HDHP, the HSA owners cannot have other health insurance & cannot be dependents; the HSAs become passive (i.e. no more contributions) once the MEDICARE starts. The HSAs can have beneficiaries, but only spouses can have Inherited HSAs; non-spouses can inherit them only as taxable accounts (net of qualified expenses for the deceased).

The HSA sponsors may have account & transaction fees. The HSAs can be invested according to your personal investment style (but beware of market risks); it is a good idea to keep deductible amounts available as cash in the spending account. It seems that Fidelity HSA allows reinvestments into the same investments, or reinvestments can be directed to core/cash account. There isn’t much clear information available on this, but several HSAs don’t allow directing reinvestments into core/cash (BNY-Mellon, HealthEquity, WageWorks, etc). Morningstar has rated the Fidelity HSA is the best for years.
The annual limits are mentioned as $x/$y, with $x for individuals, $y for families; in most cases, y = 2x, or close.

The HSAs have annual contribution limits ($4,300/$8,550 for 2025). These can be from
individuals themselves, employers, even relatives/ friends; all contributions vest immediately.
Additional catch-up contributions are allowed for 55+ ($1,000 for 2025). The deadline for
contributions for any year is April 15th of the following year. Excess contributions are taxed at 6%. HSA contributions are not allowed if on Medicare; but the HSA funds can still be used when on Medicare. The HSA funds also remain available after discontinuing the HSA coverage. As their name suggests, the HDHPs have high-deductibles ($1,650/$3,300 for 2025) but also lower premiums. Plans’ maximum out-of-pocket expenses are capped ($8,300/$16,600 for 2025).
Retirement Savers Credit doesn’t apply to HSA because HSA isn’t really a retirement vehicle although it may do double duty for it.

The HSAs cover qualified healthcare expenses beyond deductibles that are not covered by the HDHPs; the amounts beyond deductibles may be split-covered. These qualified expenses include medical, dental, vision, prescriptions, some nonprescription/ OTC drugs & products, long term care insurance (LTCI; premiums & expenses), COBRA premiums, Medicare premiums for 65+ (but NOT regular health insurance premiums, nor Medigap/ Medicare Supplemental premiums). Penalty for nonqualified expenses before 65 is 20% plus income tax.

Qualified expenses may be past, current or future (backed by records). The HSA sponsors may issue HSA debit cards or checkbooks for simplified processing.

Keep good records for HSA contributions, withdrawals & qualified expenses (past & current, claimed & unclaimed); note that there are no deadlines for self-reimbursements that are supported by receipts/ records. While prior approvals are not required for withdrawals, there are severe penalties for undocumented/ unsupported qualified expenses.

There are some advantages of EMPLOYER-sponsored HSAs over PERSONAL HSAs. While income tax benefits apply to both, the employer HSAs may offer employer contributions & convenience of payroll deductions (but Social Security & Medicare taxes are avoided on HSA contributions).

Watch the proposed bipartisan changes to the HSA for seniors, called HSSA (Health Savings for Seniors Act), that will allow contributions to the HSA when on Medicare, but disallow (1) Using the HSA for Medicare premiums, (2) Eliminate penalty-free withdrawals after 65 for nonmedical use (the abovementioned (3+) benefit of HSA). It revives a similar 2019 proposal that didn’t go anywhere.

For more information, see https://ybbpersonalfinance.proboards.com/