What is a Health Savings Account?
Congress first created HSAs in 2003, and they became available in tax year 2004. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added a new § 223 to the Internal Revenue Code (IRC) defining HSAs.
Who is eligible for Health Savings Accounts?
A taxpayer must be enrolled in a High Deductible Health Plan (HDHP) to be eligible for an HSA. As the name suggests, this is a healthcare plan with a higher deductible, but often with lower premiums. The insured must pay more out-of-pocket before the insurer begins paying benefits. An HSA provides tax-free funds to cover pre-deductible medical expenses.
Taxpayers may have more than one health insurance plan, but they must all be HDHPs. If a taxpayer has a plan that provides more coverage than an HDHP, they will not be eligible to open or contribute to an HSA. They may continue to use funds in existing HSAs.
Many financial institutions, including banks and credit unions, may offer HSAs. Taxpayers may open an account on their own, or their employer can create an account for them. Similarly, they may make their own deposits or have their employers take deposits out of their paychecks.
How is a Health Savings Account Different from Other Healthcare Spending Accounts?
HSAs are similar to other health savings accounts, such as flexible spending accounts (FSAs), in many ways. Most of these accounts provide tax advantages and are limited to qualifying medical expenses. HSAs have some important differences, though.
- HSA funds can roll over from year to year, while taxpayers can only use FSA funds in the year they deposit them.
- Taxpayers can open their own HSAs, as long as they have a qualifying HDHP. FSAs are an exclusively employer-sponsored benefit.
- Taxpayers who have HDHP coverage can open multiple HSAs. They can only have one FSA per employer. A taxpayer can only have multiple FSAs if they work more than one job.
How May Taxpayers Use Funds in Their Health Savings Accounts?
Taxpayers may use HSA funds for “qualified medical expenses,” as defined by § 213(d) of the IRC. This may include:
- Expenses related to “the diagnosis, cure, mitigation, treatment, or prevention of disease”;
- Transportation required for medical care, such as ambulance rides;
- Certain long-term care services;
- Lodging that is “essential to medical care,” provided that it is “not lavish or extravagant under the circumstances” and has “no significant element of personal pleasure, recreation, or vacation”;
- Prescription medications;
- Menstrual care products; and
- Cosmetic surgery that is directly related to “a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.”
The statute defines “cosmetic surgery” as a procedure that:
- Is intended to “improv[e] the patient’s appearance”; but
- Does not “promote the proper function of the body or prevent or treat illness or disease.”
What Adjustments Did the IRS Make for 2025?
IRC § 223 sets various numerical limits for HSAs, but these are based on economic conditions in 2003. The statute gives the IRS the authority to adjust the limits every year to account for inflation and changes in the cost of living.
Which Insurance Plans Are “High Deductible”?
The statute’s definition of “high deductible” and the IRS’s adjustment are as follows:
| Calendar year 2004 | Calendar year 2025 | |
| Deductible, individual coverage | $1,000 | $1,650 |
| Total out-of-pocket expenses, individual coverage | $5,000 | $8,300 |
| Deductible, family coverage | $2,000 | $3,300 |
| Total out-of-pocket expenses, family coverage | $10,000 | $16,600 |
What Are the Contribution Limits for 2025?
For calendar year 2004, the HSA contribution limits were $2,250 for an individual plan and $4,500 for a family plan. The statute also allows taxpayers who are at least 55 years old to contribute an additional amount, known as a “catch-up contribution.” This amount was $500 in 2004, increasing by $100 each year until 2009. It has remained at the level set by the statute for 2009, $1,000.
The 2024 and 2025 limits are as follows:
| 2024 contribution limits | 2025 contribution limits | |
| Individual coverage | $4,150 | $4,300 |
| Family coverage | $8,300 | $8,550 |
| Catch-up contribution | $1,000 | $1,000 |
What Does This Mean for Taxpayers and Employers?
HSAs are an excellent way for taxpayers to build a tax-free reserve of funds for medical needs. Employers can promote employee health and satisfaction. Both can take advantage of tax benefits.
Contact Frankel to learn more about how we can support you and your business at www.frankel.cpa or call us at (402) 469-9100.
