How HSA-eligible plans work (2024)

FAQs

How do HSA plans work? ›

A Health Savings Account (HSA) is a type of personal savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.

You must participate in a High Deductible Health Plan, have no other insurance coverage other than those specifically allowed, and not be claimed as a dependent on someone else's tax return in order to be eligible for an HSA.

An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA.

On the downside, an HSA is open only to people with HDHPs, and a high-deductible plan is not for everyone. 5 The financial benefit of an HDHP's lower premium and higher deductible structure depends on your personal situation.

Tax benefits and limitations:

You can hold and add to the tax-free savings to pay for medical care later. HSAs may earn interest that can't be taxed. You generally can't use HSA funds to pay premiums. Once you turn 65, you can use the money in your HSA for anything you want.

To contribute to an HSA, you must be enrolled in an HSA-eligible health plan. For 2024, this means: It has an annual deductible of at least $1,600 for self-only coverage and $3,200 for family coverage.

The Last Month Rule

The catch? There is a testing period of twelve months. This means you must stay eligible through the end of the next year, or else you will face taxes and penalties. For example, let's look at the individual above who became HSA-eligible on December 1.

The ultimate loophole available to almost everyone under the age of 65 in our tax code is the Health Savings Account (HSA). It is the only account you can contribute to and deduct the contribution and then withdraw the money tax free. Think about that, a tax deduction going in and no taxes going out.

Why is my health plan not HSA-eligible? ›

Coverage is the reason why many Marketplace plans aren't HSA-eligible. Eligible plans must meet these three requirements in 2024: The deductible is at least $1,600 for individuals and $3,200 for families. The most you can pay out-of-pocket is $8,050 alone or $16,100 with your family.

HSA funds cover a lot of necessary medical expenses, like copays for prescriptions and doctor visits. HSA funds can be used for medical devices, over-the-counter medications, and even menstrual care products. Unfortunately, gym memberships are considered to be outside of the scope of necessary medical expenses.

By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your out-of-pocket health care costs. HSA funds generally may not be used to pay premiums.

If you discover you accidentally paid for something other than a qualified medical expense from your HSA, you may repay the mistaken distribution prior to filing your federal taxes for the tax year of the mistake.

If you can invest for the long term—as opposed to using the HSA for current-year medical expenses—this is when you will reap the full triple-tax benefit. An HSA has better tax benefits than both Roth and pretax retirement savings accounts, provided the distributions are used for qualified medical expenses.

If you don't spend the money in your account, it will carryover year after year. Your HSA can be used now, next year or even when you're retired. Saving in your HSA can help you plan for health expenses you anticipate in the coming years, such as laser eye surgery, braces for your child, or paying Medicare premiums.

When you're changing jobs, don't forget about the money you have in your health savings account (HSA). Otherwise, you might be neglecting the advantages of HSAs: Even after you and your employer part ways, those funds are yours forever.

Yes, you can cash out your HSA at any time. However, any funds withdrawn for costs other than qualified medical expenses will result in the IRS imposing a 20% tax penalty. If you leave your job, you don't have to cash out your HSA.