Everything You Need To Know About HSA's

Benjamin Haas |

I’ve heard the word “HSA” at work and through conversations with family and friends, but what is it exactly?

A Health Savings Account (HSA) is an investment vehicle that allows you to contribute tax-deferred income (similar to when you contribute to a pre-tax 401(k)). That money grows tax-deferred and then when you use the money to pay for qualified medical expenses, it comes out tax-free (similar to a Roth IRA). It’s one of the rare triple-tax advantaged accounts! Another advantage of an HSA is that the owner controls the account and can rollover contributions which isn’t the case for an FSA (Flexible Savings Account) which is less flexible in nature.

Who can contribute to an HSA?

There are a few requirements that you have to meet to be able to contribute to an HSA. The rules include: you have to be covered under a high deductible health plan (HDHP), you can’t be covered by another health plan, you can’t be enrolled in Medicare, and you can’t be claimed as a dependent on someone else’s tax return.

Just to reiterate, if you meet all these requirements, then you are eligible to contribute but you have to remember that you can NOT be covered under your spouse’s non-HDHP health insurance.

How do I know if I have a High Deductible Health Plan (HDHP)?

This is a plan that has a higher annual deductible than typical health plans. The 2022 amounts that qualify as a HDHP are as follows:

Self-only coverage:

  • Minimum annual deductible: $1,400
  • Maximum Out-of-Pocket expenses: $7,050

Family coverage:

  • Minimum annual deductible: $2,800
  • Maximum Out-of-Pocket expenses: $14,100

Now that I know I have a HDHP, where can I open an HSA?

Any eligible person can open an HSA. An employer-sponsored HDHP typically has an associated HSA provider but if you’re self-employed or if your employer doesn’t have that resource, you can open an HSA through a bank, credit union, or a brokerage firm. If you open an account through a brokerage firm, you may be able to invest a portion of your contributions. If you have an HSA through a bank, you may have the chance to get an optimal interest rate. 

How much can I contribute to an HSA?

Similar to an IRA or other retirement vehicle, there are annual contribution limits to an HSA. For 2022, you can contribute up to the following amount:

  • Self-only coverage: $3,650
  • Family coverage: $7,300
  • Age 55 & Older: You can contribute an additional $1,000 over the self-only and family limits

These limits are a maximum contribution amount and cannot be exceeded. Therefore, you must reduce your contributions if your employer also contributes to your HSA so you don’t exceed the amounts listed above. This also applies if both spouses have HSAs, so the total aggregate contribution cannot exceed the limits above.

Lastly, you are able to contribute towards the prior tax year up until the tax filing deadline (generally April 15). For example, you have up until April 15, 2023 to make contributions for your 2022 taxes.

What is considered a “qualified medical expense?”

Insurance premiums are not included as a qualified medical expense but like anything, there are a few exceptions to the rules. That includes long-term care premiums (this is limited based on age and adjusted annually), health care continuation premiums (such as COBRA coverage), health care premiums while receiving unemployment, and Medicare premiums or other health care premiums for people age 65 or older (this doesn’t apply for Medicare supplemental policy premiums though). Medical deductibles are considered qualified medical expenses and to see the rest of the lengthy qualified medical expense list, click here.

Is there a penalty for withdrawing money from my HSA and not using it on a qualified medical expense?

 If you’re under the age of 65 and choose to withdraw funds for a non-qualified expense, the amount will be taxed as ordinary income plus a 20% penalty. If you’re 65 and above, you won’t have to pay the penalty of 20% but the money will be taxed as ordinary income and you will lose the “tax-free" aspect of this type of account.

What happens if I don’t exhaust my HSA before I pass away?

First and most important, always make sure you have a beneficiary listed so you can dictate where that money goes in the case of an unexpected passing! If you name your spouse as beneficiary, the HSA will be transferred to them and continue being an HSA. If you name someone other than your spouse to inherit an HSA, the account will stop being an HSA and the fair market value will become taxable to the beneficiary in the year of the decedent’s passing. 


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