Health Savings Account (HSA) Insurance Plans

Legislative Authority and Government Resources

When and what of HSAs

The U.S. Congress created Health Savings Accounts (HSA) in December 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Section 1201 of this Act describes Health Savings Accounts.  The Tax Relief and Health Care Act of 2006 made significant changes to HSAs and you may find this information helpful.

IRS resources for medical and HSA expenses

The Internal Revenue Service web site also has very useful information. Publication 969 describes IRS treatment of Health Savings Accounts. IRS Publication 502 describes qualified medical expenses for which HSA funds can be withdrawn without penalty.  The Health Opportunity Patient Empowerment Act of 2006 revised portions the HSA law and you may find this summary helpful.

The U.S. Department of the Treasury’s HSA website has good source information.

Eligibility to Open an HSA

First insurance, then HSA

In order to open an HSA you must first have a qualified high deductible health insurance plan (HDHP) that meets the HSA requirements. You can’t open an HSA account until you are enrolled in the health plan – first the health insurance plan – then the HSA savings account. Additionally, you can’t be covered by any health insurance plan other than the qualified HDHP.

Medicare and IRS dependent rules

You can’t be enrolled in Medicare, which usually begins at age 65. You can not open an HSA if someone else claims you as a dependent on their tax return. You can purchase a HSA compatible health insurance plan in these situations; however, you just can’t fund the deductible with the HSA account.

Keeping and spending money from a newly ineligible HSA plan

If you become ineligible for an HSA and you already have an account, you keep all of the money in the HSA account and you can use the money for qualified medical expenses. However, you can not deposit additional money into the HSA account once ineligible.

Savings Vehicle

Specific IRS rules for setting up a qualifying HSA

An HSA is a tax-exempt trust or custodial account established with a bank, insurance company or other IRS-approved entity. The HSA has unique features and must be set up with an approved entity. You can’t just set up an ordinary savings account and label it an HSA. Nor can someone deem their IRA to be an HSA.

HSA vs. FSA

An HSA is NOT like an FSA (Flexible Spending Account) which has a “use it or lose it” provision. Money deposited into an HSA account, unless withdrawn, stays in the account and remains the possession of the account holder. So, HSA’s provide you with a good opportunity to save a lot of money.

Maximum Contribution Limits to an HSA

HSA Calculations and Exceptions

1. Contributions Calculated Monthly – with an exception: The IRS calculates the HSA contribution limits on a monthly basis. You can contribute one-twelfth of the contribution limit for each full month of the year that you are covered by a qualified HSA compatible health insurance plan. For example, if you start your HSA compatible health insurance plan May 1st and have it the entire year, you can deposit eight-twelfths or two-thirds of the allowable annual amount.
2. Exception: Starting January 1, 2007 the IRS allows an exception to the pro-rated contribution requirement described above. People who become eligible to open an HSA account after January are able to make the maximum HSA contribution based on their coverage during the last month of the year. People making the maximum HSA contribution must stay on an HSA-compatible plan for an entire 12 month period. If they enroll in an HSA compatible plan after January, make the maximum contribution but do not stay enrolled for a 12 month period the pro-rated excess contribution would be considered income and become subject to a 6 percent penalty.

Types of HSA contributions

There are two types of contributions to an HSA: regular contributions and catch-up contributions.

3. Regular Contribution Limits – The “maximum contribution” is the amount the IRS allows HSA plan holders to deposit into their accounts each year In 2024 the annual contribution limit for self-only coverage is $4,150. For family coverage (two or more people) the 2024 annual HSA limit is $8,300. The maximum the IRS allows one to deposit into an HSA account each year is not related to the calendar year HSA-compatible health plan deductible. As an example, for self-coverage, if your qualified health insurance plan had a $2,000 deductible, then the regular annual contribution limit would be $4,150 in 2023. In another example, if your family qualified health insurance plan deductible were $10,000, the maximum annual contribution limit to the HSA would be $8,300 in 2024. In this latter example, you must still pay $10,000 before the insurance company paid any money towards your medical claims, yet you could only deposit $8,300 into your HSA.  Each year the IRS adjusts the contribution limits for inflation and they round to the nearest $50.
4. Catch-up Contribution Limits. People who are at least 55 years of age but not yet eligible for Medicare can contribute $1,000 and increase their HSA contribution.
5. Excess Contributions:  If you mistakenly deposit more than the annual allowed amount into your HSA account you can withdraw the excess contribution and any earnings before the income tax filing date (usually April 15th) and not have to pay the IRS a penalty. If you over fund your HSA account and don’t withdraw the excess money before the tax filing date; then, you must pay a 6 percent excise tax each year until you withdraw the money.

Employer Contributions to Employee HSAs

Employers: HSA funds ownership and tax considerations

Employers do not have to contribute to an employee’s HSA. However, when an employer chooses to deposit money into an employee’s HSA, employers should consider three issues:

1. Ownership of the funds: Employers must understand that any money they deposit into an employee’s HSA immediately becomes the possession of the employee. To borrow terms from the pension world, the employee is 100 percent “vested” in their HSA immediately.
2. Tax treatment of employer contributions: Employer contributions to employee HSAs are a business expense and are tax deductible to the employer. Employer contributions are excluded from the gross income of employees. Additionally, employer contributions to employee HSAs are exempt from:

a) Social Security taxes (6.2% of wages up to $168,600 in 2024)
b) Medicare taxes (1.45% of total wages.), and
c) Federal Unemployment Insurance taxes.
Both an employer and an employee can deposit money into an employee’s HSA up to the maximum contribution limit. Employees can contribute money into their HSA through salary deduction when the employer has set up a Section 125 Premium Only Plan that allows HSA contributions.

HSA state taxes

Note: States tax HSAs differently. As an example, in California, HSA contributions are not tax deductible, yet they are fully tax-deductible Arizona, Georgia and most other states.

HSA contribution amount and method must be the same for all participating employees

3.  Equitable contributions: Employers must contribute an equal dollar amount or equal percentage to ALL employees with HSAs if the employer contributes to ANY employee’s HSA. As an example, an employer can contribute $50 or $100 per month per employee or 50 percent of the deductible. Contributions do not have to be monthly – they can be in lump sums. Just keep in mind that if you deposit a lump of money into an employee’s HSA, they can leave the next day and take all of the money with them. Also employers have the freedom to only contribute money for employees who participate in the employer’s group HDHP insurance plan. The IRS allows different treatment for full-time and part-time employees and for self-only and family coverage – as different deductibles apply in the latter case.

“Non-highly compensated” exception

Section 306 of the Tax Relief and Health Care Act of 2006 created an exception where an employer is allowed to contribute more money into the HSA account of a “non-highly compensated employee.” The definition of a non-highly compensated employee is the same as in a qualified pension plan. If you’re an employer and you want to put more money into the accounts of lower paid employees you should consult your HSA trustee, your tax adviser and/or a third party administrator familiar with pension plan discrimination testing.

Timing of HSA Contributions

HSA contributions window and amount limits

An employee, employer or individual can deposit money into their HSA at any time during the calendar year up to the tax filing date (without extensions) of the following year, usually April 15th. You just can’t exceed the annual HSA limit described above.

Eligible HSA Medical Expenses

IRS definitions

The IRS describes medical expenses which can be paid from an HSA in IRS Publication 502.

According to the IRS, you can withdraw money from an HSA to pay for the following expenses:

Medical treatment expenses and over-the-counter drugs

• Eligible Medical Expenses (For HSA Distributions)
  • Abdominal supports
  • Abortion
  • Acupuncture
  • Air conditioner (when necessary for relief from difficulty in breathing)
  • Alcoholism treatment
  • Ambulance
  • Anesthetist
  • Arch supports
  • Artificial limbs
  • Autoette (when used for relief of sickness/disability)
  • Birth Control Pills (by prescription)
  • Blood Tests
  • Blood transfusions
  • Braces
  • Cardiographs
  • Chiropractor
  • Christian Science Practitioner
  • Contact Lenses
  • Contraceptive devices (by prescription)
  • Convalescent home (for medical treatment only)
  • Crutches
  • Dental Treatment
  • Dental X-rays
  • Dentures
  • Dermatologist
  • Diagnostic fees
  • Diathermy
  • Drug addiction therapy
  • Drugs (prescription)
  • Elastic hosiery (prescription)
  • Eyeglasses
  • Fees paid to health institute prescribed by a doctor
  • FICA and FUTA tax paid for medical care service
  • Fluoridation unit
  • Guide dog
  • Gum treatment
  • Gynecologist
  • Healing services
  • Hearing aids and batteries
  • Hospital bills
  • Hydrotherapy
  • Insulin treatment
  • Lab tests
  • Lead paint removal
  • Legal fees
  • Lodging (away from home for outpatient care)
  • Metabolism tests
  • Neurologist
  • Nursing (including board and meals)
  • Obstetrician
  • Operating room costs
  • Ophthalmologist
  • Optician
  • Optometrist
  • Oral surgery
  • Organ transplant (including donor’s expenses)
  • Orthopedic shoes
  • Orthopedist
  • Osteopath
  • Oxygen and oxygen equipment
  • Pediatrician
  • Physician
  • Physiotherapist
  • Podiatrist
  • Postnatal treatments
  • Practical nurse for medical services
  • Prenatal care
  • Prescription medicines
  • Psychiatrist
  • Psychoanalyst
  • Psychologist
  • Psychotherapy
  • Radium Therapy
  • Registered nurse
  • Special school costs for the handicapped
  • Spinal fluid test
  • Splints
  • Sterilization
  • Surgeon
  • Telephone or TV equipment to assist the hard-of-hearing
  • Therapy equipment
  • Transportation expenses (relative to health care)
  • Ultra-violet ray treatment
  • Vaccines
  • Vasectomy
  • Vitamins (if prescribed)
  • Wheelchair
  • X-rays
• Eligible Over-the-Counter Drugs (For HSA Distributions)
  • NONE – the Patient Protection and Affordable Care Act eliminated use of HSA accounts for non-prescribed medicine
• Ineligible Medical Expenses
  • Advancement payment for services to be rendered next year
  • Athletic club membership
  • Automobile insurance premium allocable to medical coverage
  • Boarding school fees
  • Bottled water
  • Commuting expenses of a disabled person
  • Cosmetic surgery and procedures
  • Cosmetics, hygiene products and similar items
  • Funeral, cremation, or burial expenses
  • Health programs offered by resort hotels, health clubs, and gyms
  • Illegal operations and treatments
  • Illegally procured drugs
  • Maternity clothes
  • Non-prescription medication
  • Premiums for life insurance, income protection, disability, loss of limbs, sight or similar benefits
  • Scientology counseling
  • Social activities
  • Special foods and beverages
  • Specially designed car for the handicapped other than an autoette or special equipment
  • Stop-smoking programs
  • Swimming pool
  • Travel for general health improvement
  • Tuition and travel expenses a problem child to a particular school
  • Weight loss programs
• Ineligible Over-the-Counter Drugs
  • Toiletries (including toothpaste)
  • Acne treatments
  • Lip balm (including Chapstick or Carmex)
  • Cosmetics (including face cream and moisturizer)
  • Suntan lotion
  • Medicated shampoos and soaps
  • Vitamins (daily)
  • Fiber supplements
  • Dietary supplements
  • Weight loss drugs for general well being
  • Herbs

HSA and insurance premiums

When can HSAs pay for health insurance?

Health Insurance may not be purchased with HSA Funds. There are 3 situations which are exceptions whereby HSA funds can be used to pay for:

1. A health plan during any period of continuation coverage required under any Federal law
2. A qualified long-term care insurance contract
3. A health plan during a period in which the individual is receiving unemployment compensation under any Federal or State Law