Learn what a Health Savings Account (HSA) is and get a high-level overview of everything you need to know to understand how this account type works.
Start your educational journey into this pre-tax account by expanding the questions in the left column you’d like to learn more about. Additional educational resources related to this section topic are available to the right.
Health Savings Accounts, commonly referred to as HSAs, are tax-advantaged IRS-approved health accounts governed by Internal Revenue Code (IRC) Section 223. They are designed to help individuals with high-deductible health plans (HDHPs) set aside money to cover qualified medical expenses and save for health expenses in retirement.
The HSA participant/accountholder owns the account. If the accountholder switches jobs, they take that account with them and get to keep all funds currently in it.
HSA funds can be used by the account holder, their spouse, or eligible dependents.
HSA contributions can be made by employees, employers, or third parties (e.g., family members or friends). These contributions can be made through a Section 125 Plan or directly into the account on a tax-deductible basis. The total dollar amount from all parties must adhere to the IRS maximum contribution limits. Contributions can be made by all parties until the tax filing deadline.
Health Savings Accounts have what many call a triple tax benefit: funds are deposited tax-free, grow tax-free, and remain tax-free when used on eligible medical expenses. This makes this account type extremely advantageous to anyone who opens one.
And good news – the company saves too! The employer will save money because FICA will not need to be paid on the tax-free salary reductions for participating employees. In some cases, state unemployment and workers’ compensation taxes can also be avoided on these amounts. Additionally, offering fringe benefits like a HSA tends to reduce costs related to retention and talent acquisition.
This section covers many of the key elements an employee would want to know before enrolling in and contributing to an HSA (with the exception of eligible expenses, which we’ll cover in-depth in Lesson3). Expand the questions in the left column that you’d like to learn more about. Additional educational resources related to this section topic are available to the right.
If taking advantage of an HSA offered through their employer, the employee would enroll during Open Enrollment. The employee owns this account and remains open with funds available to spend regardless of employment or HSA-eligibility status. However, an individual can only contribute funds if they meet the requirements set by the IRS to do so.
HSAs can also be opened by an individual through an HSA financial institution.
The account holder must meet the following requirements.
Overlapping coverage may affect HSA eligibility in certain circumstances.
This issue can be mitigated by rolling Medical Funds into a Limited Purpose FSA.
The account would remain open, and funds could be spent, but additional funds can only be added to the account once the account holder meets the HSA eligibility requirements again.
Contributions to an HSA can be changed at any time for any reason. If the HSA is offered through an employer, the employee should notify their HR representative or follow the established process to have payroll deductions changed.
The IRS sets the maximum contribution limits each year. These can be found on BRI’s Plan Limits page. For HSAs, limits are based on the type of health insurance coverage the accountholder has: single or family coverage.
Suppose eligibility to contribute to an HSA changes (e.g., due to the loss of HSA-compatible health plan coverage or having ineligible coverage). In that case, you can calculate the maximum contribution for the year by prorating it for the number of months the person is HSA eligible.Use the following formula to do so: Annual Contribution Limit ÷ 12 months × number of eligible months = Prorated Contribution
An excess contribution for HSAs refers to any contribution made to the HSA that exceeds the allowable annual limits set by the IRS. These may occur if an individual does not correctly prorate their contributions or if multiple individuals or entities contribute funds to the account.
Any excess contributions left in the HSA beyond the tax filing deadline may be subject to ordinary income tax and an additional 6% excise tax on top of the regular income tax.
To correct an excess contribution, an accountholder can ask the HSA trustee/custodian to remove the funds by providing their name, bank account number, and the request to treat it as an excess contribution. The trustee/custodian will then process the request and issue a check for the removed funds.
A big part of understanding HSAs is knowing what can and cannot be purchased under each account type. This section focuses on ways that HSA participants can spend their pre-tax dollars. Additional educational resources related to this section topic are available to the right.
An HSA is a cash balance account, so funds can only be accessed once deposited. If the account holder has insufficient funds at the time of an expense, they can pay with another payment source and reimburse themselves later.
Funds carry over from year to year so that no unused funds will be lost.
To remain tax-free, the product or service must meet the definition of medical care as found in Internal Revenue Code (IRC) Section 213(d): participants can use HSA funds to pay for expenses that primarily prevent, treat, diagnose, or alleviate a physical or mental defect or illness – not payments for cosmetic reasons or one’s that are merely beneficial to one’s general health. Additionally, expenses must be for an eligible medical service provided to the participant, their spouse, or their eligible dependents. Examples of eligible expenses include:
Unlike other pre-tax benefit plans, employers cannot restrict what’s eligible. Visit the Eligible Expenses Page for more information on what’s eligible, including an Eligible Expense Lookup Tool.
Once the account has accrued enough funds for the expense, the participant can use their benefits card, the online bill pay option, or make transfers through the HSA portal.
With an HSA, accountholders can withdraw funds for any purpose. However, withdrawing money for non-eligible medical expenses incurs ordinary tax and an additional 20% penalty. The accountholder’s responsible for determining eligible medical expenses and keeping receipts for tax reporting and potential IRS audits.
Once an account holder reaches age 65, funds can be withdrawn for any reason, subject only to ordinary tax.
This section focuses on helping you understand the intricacies of account management options available through an HSA, including investing, consolidating accounts, setting a beneficiary, and tax reporting. Additional educational resources related to this section topic are available to the right.
The IRS does not require HSA purchases to be substantiated, so third-party administrators will not request proof of purchase (i.e., a receipt). However, participants should keep all receipts and documentation if the IRS audits them.
While the options available and the process to invest may vary depending on the HSA custodian and administrator, HSA participants will typically have a selection of stocks, bonds, mutual funds, and ETFs. Investment gains aren’t taxed, so it’s an excellent way for an individual to save for healthcare costs in retirement.
Yes. To avoid this event being considered a taxable event and being hit by early withdrawal penalties, the accountholder will need to initiate an HSA Rollover or Trustee-to-Trustee transfer and follow guidelines set by the IRS.
The IRS allows an accountholder to do an HSA Rollover once per 12-month period. To initiate an HSA Rollover, the accountholder should inform their current HSA custodian that they intend to close their account and rollover funds to another custodian. The custodian will then issue a check for the entire account. The account holder is responsible for providing that check to their new HSA custodian and reinvesting any previously invested funds if they wish. Funds must be redeposited into a new HSA within 60 days to not be considered a taxable event and hit with 20% early withdrawal fees.
A Trustee-to-Trustee HSA transfer is when an accountholder initiates a transfer through their current HSA custodian by following that custodian’s established process. With a trustee-to-trustee transfer, the money would move directly from the old account into the new one, removing the potential risk of it becoming a taxable event. The IRS does not limit the number of Trustee-to-Trustee transfers over a set period.
Note that if the account holder has any investments made in their old account, the account holder will have to follow the rules of the custodian, which may create the need to liquidate investments. If the custodian allows an in-kind transfer, no action will be needed, and your current investments will remain intact.
An IRA-to-HSA Rollover is another type of HSA rollover. Also called a Qualified HSA Funding Distribution (QHFD), this type of transfer allows an individual to move funds from one retirement account to another. Some notes:
The IRS requires that the individual remains in their high-deductible health plan for one year after this transfer occurs. If you switched health plans, you would owe taxes on that amount you transferred plus an additional 10% fee
Like many retirement-based accounts, HSAs allow the accountholder to set up a beneficiary who would receive the funds in the account upon death. Designating your spouse as the beneficiary enables them to assume control of the HSA without incurring income tax. However, if a beneficiary other than the accountholder’s spouse is named or no beneficiary is identified, the HSA will be included in your taxable estate upon passing.
To fulfill HSA tax reporting requirements, the accountholder must report deposits and withdrawals on IRS Form 8889-SA when filing their taxes. The following documents will aid in filling out this form:
No. Because eligible expenses are paid with tax-free dollars, you cannot claim the same expenses on your income tax return (no double-dipping).
If the account holder has an excess contribution in their HSA at tax filing time, they must report it. When an individual removes the excess contribution during the tax year, they’ll receive a 1099-SA document detailing the distribution, which they’ll use when filing their tax return. The excess amount will be subject to ordinary tax rates and an excise tax.
Are you an employer or broker considering whether or not a Health Savings Account is a plan worth offering? In this section, we compare an HSA to other pre-tax health accounts and answer other questions you may have about plan design. Additional educational resources related to this section topic are available to the right.
Pre-tax health accounts allow participants to pay for medical expenses eligible under Section 213(d), but there are some key differences regarding factors including, but not limited to:
See the complete table comparison of these plans by downloading our Pre-tax Health Account Comparison Flyer.
Yes – the IRS sets the maximum contribution and rollover limits, but employers can adopt a lower limit for their specific plan.
We recommend funding or “seeding” accounts to help alleviate employee concerns about enrolling in an HSA. At BRI, 45% of employers offer account funding (or “seeding”). The average employer funds $638 per year for a single account, $912 for a two-person, and $1126 for a family contribution.
To qualify as HSA-compatible, the plan must have annual deductibles at or above the IRS minimum limit and out-of-pocket limits at or below the IRS maximum limit. Limits are set based on individual and family plans. These limits can be found on BRI’s Plan Limits page.
Taking advantage of plan year-end options for FSAs can benefit your Medical FSA participants but can complicate things if they want to transition to an HSA.
Check out our other New to Benefits Education Series topics.