What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged medical savings account you can contribute to and draw money from for certain medical expenses tax-free. HSAs can be used for out-of-pocket medical, dental, and vision. HSAs can’t be used to pay health insurance premiums. HSA’s can only be used with “High Deductible Health Plans” that count as “Minimum Essential Coverage (MEC).” Not every plan with a high deductible is HSA compatible, so make sure to double-check the specifics before signing your annual health insurance contract.
HSA’s can reduce AGI / MAGI to increase cost assistance eligibility levels and lower taxable income. If you invest money in an HSA, that money grows tax-free as well. HSA’s can be withdrawn from for non-medical use at a penalty, and investment portions of HSAs can involve the same risks as any other investment account.
We cover everything you need to know about HSA’s under the ACA below.
First, let’s take a look at pairing Health Savings Accounts (HSAs) with High Deductible Health Plans (HDHPs) to cover everything you might need to know in the here and now.
FACT: You need to file Form 8889, Health Savings Account (HSA) with your taxes if you are going to fund your HSA.
Minimums, Maximums, and Limits for 2023 HSAs
For 2023 a Health Savings Account can be paired with any plan with an annual deductible of more than $1,500 for self-only coverage or $3,000 for family coverage, AKA any High Deductible Health Plan (HDHP).
The 2023 HSA chart below shows several figures pertaining to HSAs and health plans.
- The minimum deductible, which is the minimum deductible your High Deductible Health Plan must have after cost assistance.
- The maximum out-of-pocket is the highest maximum a plan can have to qualify for an HSA.
- The contribution limit, which is the total you can contribute if you are under 55. Those 55 or older can contribute an extra $1,000, and this is shown in the fourth column.
TIP: You have until you file taxes for 2023 to fund your HSA for 2023 health plans (meaning you can fund it all the way up into 2024).
TIP: Some health plans have out-of-pocket maximums that are too high to qualify for HSAs. Not every ACA-compliant plan is HSA-eligible, so make sure you choose an HSA-eligible plan (the plan will be branded as such). For example, some higher-end plans have deductibles too low to qualify and some catastrophic plans have deductibles too high to qualify (as the out-of-pocket maximum for HSAs is slightly lower than the maximum in general).
Minimums, Maximums, and Limits for 2023 HSAs
|2023||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Minimums, Maximums, and Limits for 2022 HSAs
|2021||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Minimums, Maximums, and Limits for 2021 HSAs
|2021||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Important HSA Facts
Here are a few important facts about HSAs
- If you have funded your medical savings account you’ll want to fill out Form 8889, Health Savings Account (HSA) to claim your deduction.
- HSAs can affect MAGI and can pair with a High Deductible Plan (HDHP) to increase cost assistance amounts by lowering MAGI income.
- Don’t get confused, HDHP maximum requirements don’t always change on a yearly basis, but out-of-pocket maximums do.
Health Savings Accounts and High Deductible Plans
HSAs pair with high deductible plans (HDHP) only, as long as you hold an HSA eligible high deductible plan you can contribute tax-advantaged dollars to the account up to the annual limit. If you stop holding a high deductible plan, then you can keep and use the money but can’t continue to contribute. Other limits apply, so see below to get all the details on HSAs including how to save big money with Health Savings Accounts and how the ACA changes medical savings accounts.
ADVICE: ObamaCare plans pair well with Health Savings Accounts. HSAs can be used to lower your MAGI and qualify for better cost assistance on the Health Insurance Marketplace. An HSA paired with out-of-pocket costs assistance on Silver plans purchased through the Marketplace makes high deductible Silver plans very attractive.
Health Savings Account Benefits Overview
All funds you put in your HSA are 100% tax deductible from gross income and can be used tax-free to pay for out-of-pocket medical expenses, including dental and vision. There are limits to the amount of money you can put in tax-free and the amount of money you can use tax-free as well. Funds roll over year to year and can be used with Medicare after retirement. If you want to take money out of the account for non-medical reasons you must pay the appropriate income taxes and a 20% penalty.
HSA’s have these benefits and more:
- HSA’s can lower your tax bracket meaning some people will pay up to 10% less in taxes by funding their HSA each year.
- HSA’s can lower your MAGI meaning some people will qualify for more tax credits and cost-sharing reduction subsidies on Silver plans only by funding their HSA each year.
- HSA’s allow you to pay out-of-pocket costs tax-free. Often the deductible on your plan will equal the max contribution to your HSA. You pay your share of the health insurance costs tax-free. If you crunch the numbers, it’s the cheapest way to get health coverage (even without cost assistance or dropping a tax bracket).
- For non-healthcare purposes, HSA’s can be withdrawn from early at a 20% penalty, rolled over into a retirement account, or be withdrawn from without penalty at 65. You can also use the money for long-term care.
- There is no “lose it or use it” rule. You can keep your HSA money, invest it, roll it over to another savings account, and more. Even if you stop funding it, you keep the money.
HSAs, FSAs, and MSAs
Other Medical Savings Accounts include Flexible Spending Accounts (FSAs) and Archer Medical Savings Accounts (MSAs). If you fund an FSA, you can’t fund an HSA that same year. You can always use your HSA, even if you can’t fund it that year. Most of the information on this page about HSAs will apply to FSAs. The big difference is that an FSA is offered through an employer and an HSA is obtained on your own. You can have both types of savings accounts at the same time and can use them both, but can only fund one in a calendar year. MSAs are not used much anymore, but existing ones can still be funded.
Who Should Use a Health Savings Account
Anyone with a high deductible health plan (HDHP) can use a Health Savings Account. HSAs can be used by individuals and families who buy private insurance and by employees and employers. Specifically, your plan should state that it is a High Deductible Health Plan (HDHP) and is HSA eligible.If you qualify for cost assistance on the Marketplace you can use an HSA to bring down your total Modified Adjusted Gross Income, like Health Savings Accounts, and thus qualify for more subsidies. So you may want to consider a Silver HSA eligible plan.
How to Get a Health Savings Account?
You can get a health savings account from most banks. So, for instance, you can go to Bank of America (or whatever bank you use) and say, “I want a health savings account” and they will help you to set one up.
We suggest learning about the different investment options for HSA’s and reading what the Treasury Department has to say before picking an HSA option. And remember you’ll need a high deductible health plan to qualify and you’ll need to file Form 8889 at the end of the year to claim the tax benefits.
How to File Taxes For an HSA
If you have funded your medical savings account you’ll want to fill out Form 8889, Health Savings Account (HSA) so you can deduct the correct amounts from your taxable income. Don’t forget to file this form to claim the deductions!
The Investment Part of HSAs
Be aware, like a 401k, you can invest the money you put in your HSA. For those using an HSA as a savings account, strongly consider avoiding high-risk investments and instead find lower-risk investments.
Like any other tax-advantaged investment account from whole life insurance to a retirement account, you can always lose or gain money depending upon the risks you are willing to take. Typically the basic HSA investment plan will return between .05% – .1% on your money annually, you can take more risky investments, but be aware there may be additional fees and risks involved.
The money you make in an HSA can be used tax-free for qualified medical expenses, but again you risk losing this money as you’ll be tying it to the market.
HSAs Can Be Used For Many Health Expenses
HSAs can be used for nearly everything related to medical except insurance premiums, dental, or vision. The list even includes some over-the-counter items. The use of your HSA is relegated by Section 213 (d) of the Internal Revenue Code and more information is offered in IRS Publication 502 titled, “Medical and Dental Expenses.”
As you can imagine the list of each thing you can use your HSA for is long so see our page on “what can I use my HSA for” for more details.
HSAs and High-Deductible Plans
You can only pair an HSA with a High Deductible Health Plan (HDHP). Your plan is considered a High Deductible plan if it has an annual deductible that meets the current published limits as noted above.This video explains High Deductible Plans and HSAs well.
How ObamaCare Changes Medical Savings Accounts
There are some changes to medical saving account limits and deductions under the Affordable Care Act.
Medicine Cabinet Tax
Over-the-counter medicines no longer qualified as medical expenses for flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer Medical Saving accounts (MSAs).
Additional Tax on HSA/MSA Distributions
Health savings account or an Archer medical savings account, penalties for spending money on non-qualified medical expenses. 10% to 20% in the case of an HSA and from 15% to 20% in the case of an MSA.
Flexible Spending Account Cap 2013
Contributions to FSAs are reduced to $2,500 from $5,000.
Medical Deduction Threshold tax increase 2013
The threshold to deduct medical expenses as an itemized deduction increased to 10% from 7.5%.
HSAs and Tax Benefits
HSAs allow you to set aside tax-free dollars to pay for routine, out-of-pocket health expenses. You also pay no federal taxes on interest earned by your HSA as long as you use the money to pay for eligible medical expenses, as defined by the IRS. Dental & vision are included.
Not only can you pay for care tax-free, but an HSA can also lower your tax bracket (reducing the amount you pay in taxes by up to 10% depending upon your income and qualify you for more cost assistance. Since many HSA qualified plans are “silver plans on the Marketplace,” people can use this to adjust the cost-sharing reduction (CSR) level of their plan and qualify for more cost-sharing reduction subsidies.
Reporting Health Savings Account Information on Tax Returns
TIP: See historic HSA levels for back filing.
Can I Take Money Out of my HSA?
You can take up to your annual out-of-pocket limit out each year to pay for medical expenses. If you want to take money out for something else, you will pay a 20% penalty in addition to it being taxed.
Unlike an FSA, HSA funds roll over annually & accumulate, even if an employee changes jobs. The accumulated funds can be removed for non-eligible expenses, but then will be subject to Federal Income Tax and a 20% penalty. Once an individual qualifies for Medicare, these accumulated funds can still be used tax-free for medical expenses Medicare doesn’t cover or can be used like an IRA or 401k (however you’ll still have to pay taxes on this, but no penalty). In addition, should a person decide they no longer want to use a high-deductible health plan, these funds can usually be rolled into an IRA retirement account without facing taxes.
Two Different Out-of-Pocket Maximums
HSA’s have had a slightly different out-of-pocket maximum (OOP maximum) for HSA eligible and non-HSA eligible plans since 2015.
The OOP maximum limits for HDHPs are governed by the indexing required in the Internal Revenue Code, while the indexing for general OOP maximum limits is determined by the Department of Health and Human Services. The HHS one is always higher; this allows for some non-HSA eligible HDHPs to be sold. So double-check that your plan is HSA eligible.
Other Types of Health Savings Accounts
Aside from HSAs, which most folks will use who choose to use a medical savings account, there are also Flexible Spending Accounts (FSAs) and on some grandfathered plans Archer Medical Savings Accounts (MSAs).
FSA Flexible Spending Account. FSAs are set up through an employer plan & they allow you to set aside pre-tax dollars for certain health and dependent-care needs. For example, the money can be used to pay for deductibles, prescription co-pays, and other treatments not covered by your insurance. A big downside for many: whatever you don’t use by the end of your company’s benefits year will be forfeited. Check with your employer’s Human Resources department for specifics on their FSA. They can provide a list of FSA-qualified costs that you can purchase directly or can collect reimbursement. A few common FSA-qualified costs include:
- Copays for medical treatments & doctor visits,
- Hospital & Doctor fees for medical tests & services like X-rays & cancer screenings.
- Physical Rehabilitation.
- Dental & Orthodontic expenses like cleanings, fillings, or braces.
- Inpatient treatment for alcohol or drug addiction
- Vaccines or immunizations & flu shots.
MSA “Archer” Medical Savings Account. The Archer MSA was intended to be used by self-employed individuals & small businesses with fewer than 50 employees. The plan is entirely self-directed, including its initial setup & compliance with the plan thresholds. It works very closely to HSAs & has been replaced by HSAs since 2007. However, some grandfathered plans may still use MSAs that have been “left open.”
Health Savings Account Limits History
Below you can see how HSA limits have changed each year from 2015 – 2020 under the ACA. See more recent limits above.
- For 2020 a Health Savings Account can be paired with any plan with an annual deductible of more than $1,400 for self-only coverage or $2,800 for family coverage, AKA any High Deductible Health Plan (HDHP).
- For 2019 a Health Savings Account can be paired with any plan with an annual deductible of more than $1,350 for self-only coverage or $2,700 for family coverage, AKA any High Deductible Health Plan (HDHP).
- For 2018 HSA annual contribution limits are $3,500 for an individual and $7,000 for a family. 55 and older can contribute an extra $1,000. Limits subject to change each year.
- For 2017 HSA annual contribution limits were $3,400 for an individual and $6,750 for a family. 55 and older can contribute an extra $1,000. Limits subject to change each year.
- For 2016 HSA annual contribution limits were $3,350 for an individual and $6,750 for a family. 55 and older can contribute an extra $1,000.
- For 2015 HSA annual contribution limits were $3,350 for an individual and $6,650 for a family. 55 and older can contribute an extra $1,000.
History of HSAs
Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. An adult who is covered by a high-deductible health plan and has no other first-dollar coverage may establish an HSA.
- Instructions for Form 8889, Health Savings Accounts
- Health Savings Accounts and Other Tax-Favored Health Plans – IRS publication 969, complete instructions. It includes what is new, qualified medical expenses, qualifying for plans and benefits, contributions, distributions, balances, the death of an account holder, forms required, and more.