A Health Savings Account (HSA) is a medical spending account that allows account holders to use tax-free balances to pay for their HSA eligible medical expenses. These accumulated funds do not have an expiration date, and can be used whenever necessary. Contributing to an HSA today can help employees pay for healthcare expenses now, while more importantly saving for their financial future.
When employers offer their employees an HSA as part of a robust benefits package, they encourage employee participation, boost staff morale, and contribute to a fulfilling work environment.
If you’re considering including an HSA in your employee benefits package, here’s what you need to know to get started.
Who is eligible for an HSA?
IRS rules state that an individual must meet the following basic requirements in order to be eligible for an HSA:
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Be covered by an HSA-eligible health plan, otherwise known as a high-deductible health plan (HDHP)
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Not be covered by any other health plan that would disqualify them from an HSA (for example, a spouse’s plan or a medical flexible spending account)
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Not be enrolled in Medicare
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Not be claimed as a dependent on someone else’s tax return
What expenses are eligible?
Hundreds of medical expenses are considered eligible for HSA funds. Although it is determined on a case-by-case basis, some common examples include bandages, first-aid kits, and copays for medical, dental, or vision appointments. It’s also important to note that some common treatments, like acupuncture or certain forms of therapy that are not always covered by insurance, may be covered using HSA funds.
How much can a participant contribute to an HSA?
When an account holder has an HSA through their employer, they can make contributions directly through payroll deductions or via direct deposit.
The IRS sets contribution limits on HSAs every year. For 2023, the annual limitation on contributions for an individual with self-coverage under an HDHP is $3,850 — with the limit increasing to $4,150 in 2024. For an individual with family coverage, contributions start at $7,750, rising to $8,300 in 2024.
When can a participant invest their HSA funds?
Employers generally determine what a participant’s balance must be before they can invest their funds. That balance amount is referred to as the investment threshold.
If a participant has an HSA, then the investment threshold is set by the HSA administrator. Refer to your account rules to learn your HSA’s investment threshold. Devenir found that most HSA investment thresholds are between $1 and $1,000.
Do all funds carry over from year to year?
Yes! One of the greatest perks of an HSA is that all funds carry over regardless of an individual’s HSA eligibility. This makes accounts ideal for investing and retirement planning. HSAs are also portable, so employees never lose ownership as long as the HSA remains active and open.
When can a participant change their HSA contribution amount?
HSA participants can change their contribution amounts at any time during the plan year. Participants should check with their employer if they want to do this through their payroll on a pre-tax basis.
What happens if funds are spent on ineligible expenses?
If an individual spends HSA funds on ineligible expenses before the age of 65, they are required to pay income tax on their purchase and face a 20 percent tax penalty. Once they pass 65, however, they will not be penalized, though funds spent on ineligible expenses would still be subject to income tax.*
Add more value to your current benefit offering. Contact our Health Account Services experts for more information.
