Health Savings Accounts and High-Deductible Health Plans: The Basics
Health Savings Accounts (HSAs) paired with High-Deductible Health Plans (HDHPs) offer significant tax advantages for eligible individuals. Understanding how these tools work helps you evaluate whether this combination makes sense for your situation.
What Is an HDHP? A High-Deductible Health Plan is a health insurance plan with a minimum deductible and maximum out-of-pocket limit set by the IRS each year. HDHPs typically have lower premiums than traditional plans in exchange for higher deductibles before coverage kicks in. HDHPs must meet specific IRS criteria to be HSA-eligible.
What Is an HSA? A Health Savings Account is a tax-advantaged savings account specifically for healthcare expenses. You must be enrolled in an HSA-eligible HDHP to contribute to an HSA. Funds in the account belong to you permanently—they don't expire and roll over year to year.
The Triple Tax Advantage. HSAs provide three tax benefits: contributions are tax-deductible (or pre-tax through payroll), growth is tax-free, and qualified medical expense withdrawals are tax-free. This triple tax benefit makes HSAs uniquely powerful compared to other tax-advantaged accounts.
Contribution Limits. The IRS sets annual contribution limits for HSAs, with higher limits for family coverage and additional catch-up contributions allowed for account holders age 55 and older. Contributions can be made by you, your employer, or others.
HSA and Medicare. Once you enroll in Medicare (any part), you can no longer make new HSA contributions. However, you can continue to use existing HSA funds for qualified medical expenses tax-free. Planning around this rule is important for people approaching Medicare eligibility who have been building HSA balances.
