Drive adoption and confidence in HSAs with in-depth answers to common questions.
We know that your clients and employees come to you with a number of questions about HSAs, how they work, and how to get the most benefit out of them. We’ve compiled the top HSA questions we receive and provided easy-to-understand answers. You can share this document with your clients and employees and use it to help support HSA education and adoption. We’ve also provided links to additional resources so you can dig deeper and learn more.
A Health Savings Account (HSA) is a tax-advantaged, personal savings account used to save and pay for eligible healthcare expenses. It is:
Funds in an HSA never expire and are fully owned by the account holder, not the employer. HSAs are not tied to a specific health insurance provider and can be paired with any qualifying health plan.
Each year the IRS establishes annual HSA contribution limits. In 2023 they are:
For 2024 they are:
Those 55 years or older are eligible to contribute an extra $1,000 annual catch-up contribution.
Learn more in our comprehensive HSA Guide.
To qualify for an HSA, an individual must meet the following criteria:
Eligibility is not a requirement for usage. HSA funds never expire and the account holder can always use the funds for qualified, out-of-pocket medical expenses.
Read more about HSA eligibility requirements.
A High Deductible Health Plan (HDHP) is a health insurance plan defined by lower premiums and a higher deductible. HDHPs offer affordable health insurance coverage while offering savings opportunities when paired with an HSA. Preventative care by in-network providers is 100% covered, regardless of whether employees have met their deductible. HDHPs are also the only health insurance option that can be paired with a Health Savings Account (HSA). An HSA can help pay for the high-deductible or to save money for future medical costs.
The minimum deductible and out-of-pocket maximum for an HDHP is set each year by the IRS.
2023 minimum deductible:
2023 out-of-pocket maximum:
To learn more, consult our HDHP Guide.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both tax-advantaged accounts that enable employees to save money on qualified, out-of-pocket medical expenses.
An FSA is an employer owned account that pays for short-term expenses and account holders must use the funds they contributed by the end of their plan year. FSAs work with a wide variety of health plans, but are typically only available through employers that offer employer-sponsored health plans. The account holder does not need to enroll in their employer sponsored plan to be eligible to sign up for the FSA.
HSAs are individually owned and funds never expire, so account holders can use them for short-term expenses, or long-term savings, like retirement. Account holders also have the ability to invest HSA funds so they grow tax free. HSAs can be opened by anyone over the age of 18 with a qualifying high deductible health plan.
View our infographic for more details about the differences between HSAs and FSAs.
HSAs offer account holders multiple benefits. They include:
HSAs can also serve as a complementary retirement account as HSA funds never expire, and belong to the account holder, even with employer-sponsored HSAs. In addition, after age 65 HSA funds can be spent on anything, penalty-free, though non-medical expenses are still subject to ordinary income tax. Withdrawals used for medical expenses are both penalty and tax free.
To demonstrate how much someone can save with an HSA, use our HSA Savings Calculator.
When paired with an HDHP, HSAs offer several significant benefits for employers, including:
To see how much an employer can save with an HSA, use our Payroll Tax Savings Calculator.
HSA money can come from a variety of sources:
Account holders can choose to schedule one-time contributions or ongoing monthly contributions up to the annual contribution limit.
Other ways of getting funds into an HSA account include:
HSAs can be used to pay for thousands of qualified expenses incurred both today and in the future. These expenses are set and regularly updated by the IRS. In addition to everyday expenses and over-the-counter items like first aid, sunscreen, and menstrual products, some extra HSA expenses are eligible if prescribed by a doctor or with a note of medical necessity.
The only requirements are that the account holder had the HSA established at the time the expense was incurred (date of service) and that the expense was not reimbursed in any other way. Because these expenses are regulated by the IRS, it’s up to the account holder to stay compliant. In order to substantiate a qualified medical expense purchase to the IRS in case of an audit, account holders need to keep documentation, such as a copy of their receipt. If an account holder spends money on non-qualified HSA expenses before the age of 65, they can incur a 20% penalty in addition to income taxes. At Lively, we give account holders the ability to store various documents tied to an expense.
To access HSA funds, account holders can either use a debit card provided by their HSA provider at the point of purchase or submit receipts for reimbursement from their HSA provider. An account holder can use their HSA funds to pay for medical expenses for themselves, their spouse, or other tax dependents even if they only have individual coverage through an HDHP.
To see what’s eligible, consult Lively’s list of qualified HSA expenses.
HSAs allow account holders to invest their funds and those investments grow tax-free. However, not every HSA provider allows investment or every investment option. In general, HSAs come in three forms: traditional savings accounts, self-directed investment accounts, and guided portfolio investment accounts.
Traditional savings accounts do not offer the ability to invest, but account holders can earn interest on their funds.
A self-directed HSA allows account holders to invest in a wide range of investment options including: individual stocks, ETFs, mutual funds, CDs, and bonds.
A guided portfolio HSAs gives account holders personalized investment suggestions based on the account holder’s preferred risk profile and how long they have until retirement.
If an HSA provider allows HSA funds to be invested, account holders will have two actual accounts under their HSA umbrella: a cash account and an investment account. The cash account is where contributions are deposited and from where they pay for qualified medical expenses. The investment account is what is used to buy and sell investments.
Some HSAs, like Lively, offer first-dollar investing, though many providers require minimum account balances in order to invest HSA funds. All types of investments are typically subject to some fees, whether those are commissions, trading fees, or other varieties of fees.
Learn more about HSAs and investments.
If an individual is enrolled in a HDHP (HDHP) that is HSA-eligible, and is at least 55 years old—or will turn 55 any time in the calendar year—they can make an additional $1,000 contribution to an HSA. Once they are enrolled in Medicare—typically age 65—they are no longer allowed to contribute to an HSA. But using the 10-year window between the ages of 55 and 65 to make higher “catch-up” contributions can be valuable come retirement, as it gives the account holder more tax-free dollars to use for out-of-pocket medical expenses at any time in retirement.
HSAs are an excellent option for saving on healthcare in retirement, when medical expenses tend to increase. Once the account holder decides to participate in any type of Medicare (Part A, Part B, Part C - Medicare Advantage plans, Part D, and Medigap), they can no longer contribute to an HSA.
After 65, account holders can use HSA funds tax-free for qualified medical expenses such as Medicare premiums, long-term care insurance, and other out-of-pocket expenses. Account holders can also use their HSA like any other retirement account. Before 65, if you withdraw money from your HSA for a non-qualified medical expense, you must pay income tax and an additional 20% penalty. After 65, the 20% penalty no longer applies and they can use their HSA funds for non-medical expenses, though these expenses are subject to income tax.
Learn more about HSAs after retirement.
A rollover requires the account holder to deposit withdrawn funds with a new custodian. The trustee-to-trustee transfer occurs without the account holder taking possession of the funds.
A direct rollover involves withdrawing funds from an HSA in the form of a check and then transferring (depositing) those funds with a new HSA provider. The account holder has 60 days from withdrawal to deposit the funds with a new custodian—or face a 20% income tax. The account holder is limited to one HSA rollover every 12 months.
A trustee-to-trustee transfer is when the previous health savings account provider makes a direct transfer to the new account provider. In this instance, the account holder never takes possession of the funds. There is no limit to the number of trustee-to-trustee transfers an account holder can make.
Learn more about the differences between a rollover and trustee-to-trustee transfer.
If an account holder goes over their contribution limits, the IRS considers that money an excess contribution. There are three consequences for making excess HSA contributions:
To avoid potential penalties, the excess contribution must be withdrawn before the tax year ends. Account holders can make a request with their HSA provider to remove the excess contribution. If they have been contributing to their HSA via payroll, they should also inform their employer.
Once the money is taken out it will be considered regular, taxable earned income. If the excess contribution is removed before the end of the calendar year, in most cases the account holder will not need corrected tax forms, but may need them if they remove it after the calendar year, but before the tax filing deadline. If the excess contribution is not removed until after the tax year has ended the account holder will be subject to excise tax for that year and all other years the excess contribution remains in the account.
To be eligible to contribute to a health savings account (HSA), an account holder must be enrolled in a qualified high deductible health plan (HDHP). Some reasons an account holder may no longer be eligible for an HSA include:
An HSA and the funds in the account belong to the account holder and never expire. It can also be transferred from provider to provider. The funds don’t go anywhere even if the account holder becomes ineligible to contribute to an HSA. The account holder can still spend the money, or use the funds to reimburse themselves tax-free for qualified medical expenses. In addition, they can still invest the money in their HSA even if they’re no longer eligible to contribute to their account.
Becoming eligible for an HSA mid-year is a common occurrence. It may happen if an employer changes insurance plans mid-year, or an account holder gets a new job with a different insurance plan.
HSA eligibility always starts on the first of the month. If someone enrolls in an HSA-eligible HDHP plan on June 15, and they become HSA-eligible on July 1. If they stay at the job all year and their insurance plan and eligibility doesn’t change, they would be HSA-eligible for six months (July, August, September, October, November, and December). Their contribution amount will be prorated. This is based on their eligibility start data (by month) and prorated for the number of months they are HSA eligible.
The same prorating happens if someone becomes HSA-ineligible mid-year. This happens often for people enrolled in medicare coverage.
There’s an important caveat to the info above—the Last Month Rule (also called the “full contribution rule”). The last month rule says if someone is HSA-eligible on December 1, then they can choose to contribute the full amount for the year, even if you weren’t eligible for the whole year. However, there is a “testing period” of twelve months. This means they must stay eligible through December 31 of the next year, or their excess contributions will be subject to a 10% penalty.
The Last Month Rule (also called the “full contribution rule”) says if someone is HSA-eligible on December 1, then they can choose to contribute the full amount for the year, even if they weren’t eligible for the whole year. They are subject to a twelve month “testing period,” meaning that the account holder must stay eligible through the end of the next year, or else face taxes and penalties.
For example, if an individual became HSA-eligible on December 1 and chose to contribute the full amount up to the annual contribution limit to their HSA, they must continue to be eligible all the way through December 31 of the following year. If they don't, their excess contributions will be taxable and subject to a 10% penalty. If an individual becomes disabled during the following year, there are specific reasons they may no longer be eligible, which may impact this rule.
The last month rule presents an opportunity to weigh the risks and rewards of making a full HSA contribution. If an account holder foresees no change to their job or eligibility status, and wants to build their HSA savings, it could be a smart choice. However, if they are planning on changing their job or coverage it may not be the right option.
Whether an account holder of an individual or family health plan, an HSA account is ultimately owned by the individual. Therefore, the Health Savings Account is an integral part of the estate planning process. And there are tax considerations that will determine whether an HSA transfer from an individual to a spouse, beneficiary, or estate is the best option.
Spouse transfer: There are no tax implications. The HSA is transferred directly to the spouse. They can then continue using the HSA money for spending, saving, or investing within the standard IRS guidelines. It remains an HSA, and the same tax-advantaged rules continue to apply. This type of transfer does not happen automatically and requires that the account holder designate their spouse as a beneficiary directly with the bank holding their funds to qualify for the tax benefits.
Beneficiary (not a spouse) transfer: The HSA ends on the date of the individual’s death. The funds are then distributed and taxed as income to the beneficiary at fair market value. However, the beneficiary can use the HSA funds to pay for medical expenses of the account holder for up to 12-months after their death.
Estate or no beneficiary designated transfer: The HSA will be distributed to the estate and taxed as income on their final income tax return.
In a world of burdensome benefits platforms, Lively stands out. Lively’s unparalleled customer service and innovative features enables easy set up and simple Health Savings Account administration that saves valuable time and money. Lively’s HSA is simple, trusted, and reliable. In short, it just works for your clients and your employees.
To learn more about how our benefit solutions can help you achieve your goals reach out to us.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.