Health Savings Accounts 101
If you have a high-deductible health plan (HDHP), you may be able to establish a Health Savings Account (HSA) to help off-set some of the costs not covered by your insurance.
How HSAs Work
HSAs allow you to contribute pre-tax income to a specific savings account specifically to cover routine medical costs. You can withdraw money from the HSA to pay for these medical expenses without paying tax on that income. However, if the money is used for anything other than qualified medical expenses, you will pay regular income tax on that money, in addition to a 20% penalty. Distributions made after age 65 are not subject to penalties.
There are limits on how much can be contributed to a health savings account each year. For 2023, the limits are:
- Up to 50 years Old-max annual contributions = $3,850
- 50 Years or Older, max annual contributions = $4,850
- Up to 50 years old-max annual contributions = $7,750
- 50 years or older-max annual contributions = $8,750
Once an HSA is established, you can make your contributions at any time between January 1 and April 15 of the following year, but the account must be established by December 1 to qualify.
Who Can Set Up an HSA?
In order to set up an HSA, you must meet four requirements:
- You must be covered by an HDHP, which is a health insurance policy with a deductible of at least $1,400 for individuals or $2,800 for a family. The policy must also have out-of-pocket limits up to $7,000 for an individual and $14,000 (2021) for a family. The health insurance policy does not provide medical benefits (beyond certain preventative care) before the deductible is met, and you don’t have access to a different plan or a rider offering prescription drug coverage before the deductible.
- You are not eligible for Medicare.
- You don’t have access to another health insurance plan that is not an HDHP.
- You aren’t claimed as a dependent on someone else’s tax return.
- Contributions cannot be made after the participant attains age 65 and is enrolled in Medicare.
Source: IRC Source IRC Sec. 223(c )(2)