Health Savings Accounts provide tax-advantaged retirement investments for certain individuals. They provide triple tax benefits:
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Tax-free contributions within annual limits (prior to start of Medicare),
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Tax-free investment growth, and
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Tax-free money to cover most retirement health costs.
Health Savings Account (HSA) Defined
One expense that is almost certain to increase in retirement is health care. Fortunately, seniors qualify for Medicare benefits at age 65 and can obtain additional health care coverage through supplemental (Medigap) or Advantage programs. A few may also receive health care benefits from their prior employer. Regardless, many seniors pay thousands of dollars annually for medicine and uncovered health care expenses. Wouldn't it be great to have an investment account, funded with tax-free contributions while working, that pays for uncovered health care costs in retirement? Well, there is such an account, and it is a Health Savings Account (HSA).
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (See definition below).
HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which included the enactment of Internal Revenue Code section 223, effective for tax years beginning after December 31, 2003. They were developed to replace the medical savings account system.
HSAs are used to cover qualified medical expenses as defined below. After the participant begins receiving Medicare benefits, HSA account funds may be withdrawn and used for any purpose tax free.
High-Deductible Health Plan Defined
Deductibles for high-deductible health plans fall between these limits:
| 2022 | 2023 | ||
| Individuals | |||
| Minimum Deductible | $1,400 | $1,500 | |
| Maximum Deductible | $7,050 | $7,500 | |
| Family | |||
| Minimum Deductible | $2,800 | $3,000 | |
| Maximum Deductible | $14,100 | $15,000 | |
Tax Advantages of HSAs
As stated above, Health Savings Accounts are not subject to federal income tax throughout their life under most circumstances. They are also exempt from FICA and from state income taxes in all states but California and New Jersey. For seniors receiving Medicare, HSAs have characteristics similar to Roth IRAs in that there are no required distributions and withdrawals are tax free.
HSA funds roll over and accumulate year to year if they are not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA). The accounts are a component of consumer-driven health care.
Withdrawals for non-medical expenses are treated very similarly to those in an individual retirement account (IRA) in that they may provide tax advantages if taken after retirement age, and they are subject to a 20% penalty in addition to ordinary income tax if taken earlier.
Obtaining a Health Savings Account
HSAs are sometimes provided through an employer and could include employer contributions. If not, they can be obtained directly by the employee through one of the vendors listed below.
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage, later.
- You aren't enrolled in Medicare.
- You can't be claimed as a dependent on someone else's tax return.
Qualified HSA Expenses
HSA funds may be used to pay for qualified medical expenses at any time without federal tax liability or penalty. Health savings account participants do not have to obtain advance approval from their health savings account trustee or their medical insurer to withdraw funds. Qualified expenses include costs for services and items covered by a health plan including cost-sharing such as a deductible and coinsurance, or co-payments. Following is a list of major qualified expenses:
- Doctor visits
- Medications
- Medical equipment
- Dental care
- Vision care including eyeglasses
- Hearing aids
- Mental health services
- Chiropractic care
- Over-the-counter medications and menstrual products (as of 2020)
- Transportation expenses related to medical care
Health insurance premiums are generally not HSA eligible, except for some specific cases such as COBRA premiums, premiums while on unemployment, certain Medicare expenses. According to the IRS, insurance premiums are not considered qualified medical expenses, with some exceptions like long-term care insurance.
HSA Contribution Limits
You can contribute to a Health Savings Account after you retire as long as you are not enrolled in Medicare. Once enrolled in Medicare, you can spend your accumulated funds but can't add to your account. If you're enrolled in family coverage, you can contribute up to the family contribution limit even if you're the only family member covered on the plan who's eligible to open and fund an HSA.
A taxpayer can generally make contributions to a HSA for a given tax year until the deadline for filing the individual's income tax returns for that year, which is typically April 15. All contributions to a health savings account from both the employer and the employee count toward the annual maximum.
| Year | Contribution Limit (Single) |
Contribution Limit (Family) |
Catch-Up Contribution (55 or older) (Single and Family) |
| 2004 | $2,600 | $5,150 | $500 |
| 2005 | $2,650 | $5,250 | $600 |
| 2006 | $2,700 | $5,450 | $700 |
| 2007 | $2,850 | $5,650 | $800 |
| 2008 | $2,900 | $5,800 | $900 |
| 2009 | $3,000 | $5,950 | $1,000 |
| 2010 | $3,050 | $6,150 | $1,000 |
| 2011 | $3,050 | $6,150 | $1,000 |
| 2012 | $3,100 | $6,250 | $1,000 |
| 2013 | $3,250 | $6,450 | $1,000 |
| 2014 | $3,300 | $6,550 | $1,000 |
| 2015 | $3,350 | $6,650 | $1,000 |
| 2016 | $3,350 | $6,750 | $1,000 |
| 2017 | $3,400 | $6,750 | $1,000 |
| 2018 | $3,450 | $6,900 | $1,000 |
| 2019 | $3,500 | $7,000 | $1,000 |
| 2020 | $3,550 | $7,100 | $1,000 |
| 2021 | $3,600 | $7,200 | $1,000 |
| 2022 | $3,650 | $7,300 | $1,000 |
| 2023 | $3,850 | $7,750 | $1,000 |
| 2024 | $4,150 | $8,300 | $1,000 |
Best HSA Plans/Vendors
When using an HSA as a spending account to cover current healthcare costs, the best HSAs do the following:
- Offer spending accounts without maintenance fees regardless of account size.
- Pay reasonable interest rates on deposits.
- Eliminate or limit additional fees.
- Offer FDIC insurance on the spending account.
The source of the following chart is Morningstar Inc. assessments as of August 31, 2023:
| Provider | Overall Assessment | Price | Quality of Investments | Investment Threshold * |
| Fidelity | High | $ | Above Average | High |
| HealthEquity | Above Average | $ | Above Average | Above Average |
| Associated Bank | Above Average | $$$ | Above Average | Above Average |
| Lively | Average | $$$$ | Above Average | High |
| Saturna | Average | $$$$ | High | Average |
| UMB | Average | $$ | Above Average | Average |
| Bank of America | Average | $$$ | Above Average | Average |
| USA Bank | Average | $$$ | Above Average | High |
| Optum | Average | $$$$ | Above Average | Above Average |
| First American Bank | Average | $$$ | Above Average | Average |
* A high assessment for Investment Threshold indicates no investment threshold., while a low investment threshold indicates an Investment Threshold of $2,000.