HSA Tax Guide

Introduction

The tax deadline to file 2024 taxes is April 15, 2025. The IRS announced that individuals and businesses affected by Hurricane Helene in Alabama, Georgia, North Carolina, South Carolina and parts of Florida, Tennessee and Virginia may have until May 1, 2025 to file various tax returns and make tax payments. Please talk to your tax professional for more information.

If you have an HSA, you may be wondering what additional tax forms you’ll need to know about come April 15th. Good news: There are only a few extra forms you need to know about when filing your taxes. A health savings account (HSA) is a tax-advantaged savings account that you may open and contribute to if you are enrolled in a qualified high deductible health plan (HDHP) and are otherwise qualified. These two are paired because the contributions you make to your HSA can help you cover your deductible and other out-of-pocket medical expenses that are typically higher with high deductible health plans than with traditional plans.HSAs are considered to be triple tax-advantaged. This refers to the fact that contributions to your HSA are tax-deductible, funds in your HSA grow tax-free, and qualified distributions are also tax-free. There are annual limits to how much you may contribute to your HSA. There are also limits as to what is considered to be a qualified medical expense.In this guide we will cover:

• How HSAs are taxed

• Tax forms associated with having an HSA

• Need-to-know info on HSA contributions and distributions

• HSA rules impacted by the CARES Act

Let’s dive in.

Tax Benefits

We’ve already talked a little bit about how HSAs are triple tax-advantaged. That is a huge benefit as you plan to pay for qualified medical expenses. But that’s not the only benefit of having an HSA. HSAs are also a great way to grow your money and save for retirement.Here are the key tax benefits of an HSA:

1. HSAs are triple tax-advantaged.

2. You can invest funds in your HSA.

3. Starting at age 65 you can spend your HSA funds on anything, without a penalty.

Benefit 1: They have a triple-tax advantage

HSA contributions are tax-free. For example, if your tax rate is 22 percent, and you contribute the maximum amount for 2023, which is $3,850 for an individual or $7,750 for a family, you could save $847 and $1,705 respectively, in tax payments. If you’re over 55 and not yet enrolled in Medicare, you can contribute an additional $1,000 per person, per year. That’s an additional $220 in tax savings.

HSAs grow tax-free. This makes HSAs a great tool to save money for the long-term, including for retirement. As you contribute money over the years you won’t be hit with tax bills along the way, so you can continue building up a nest egg for later in life.

HSA distributions for qualified healthcare expenses are tax-free. There are myriad qualified expenses, including co-pays, prescription drug costs, your deductible, and qualified over-the-counter expenses. If you bought a traditional healthcare plan your annual deductible may be lower, but you would have to pay for it, and other medical expenses, with after-tax money unless enrolled in another tax-free account such as an FSA.

Benefit 2: You can invest funds

Many people with HSAs don’t take advantage of this benefit, but it has the potential to be a key component of your financial planning. In your HSA, earnings from interest and investments are tax-free. If you are planning to contribute funds to your HSA in order to save for retirement, you may want to consider if investing some of your funds is the right option.

Of course, if you are expecting an expensive medical cost soon, it may be smart to have more liquid assets in your HSA to pay for that expense. If and how you invest depends on your goals and risk-tolerance. We recommend chatting with your financial advisor before investing. Everyone's finances are different, and they can help choose the best options for your personal situation.

Benefit 3: Starting at age 65 you can spend your funds on anything without a penalty

At any age, you can use HSA funds for qualified medical expenses tax-free. But before age 65, if you use HSA funds on non-qualified expenses, those funds will be subject to income taxes and a 20% penalty. Ouch!

Once you are 65 and older, that penalty no longer applies. That means that you can use your HSA funds for something other than a qualified healthcare expense and pay regular income tax as you would with a traditional 401(k) or IRA. Since your money rolls over from year-to-year (there’s no “use it or lose it”), and it isn’t tied to a particular employer, an HSA can be a great way to save for retirement. You can contribute money knowing that it's likely you’ll have medical expenses come up as you age. But if you have other expenses come up during retirement, you also have those HSA funds available to use without any additional penalty.

Tax Implications

You can probably guess the major implication of contributing to an HSA: It lowers your income taxes. But there are a few other tax implications to be aware of so you don’t end up owing more than you expect.

Make sure you are HSA eligible

You should always be aware of whether or not you’re eligible to make pre-tax contributions to your HSA. You are only eligible to contribute to your HSA if you have an HDHP and do not have additional coverage as part of a spouse’s traditional health plan. You can have additional insurance to cover dental, vision, disability, long-term care, accidents and hospitalization, but if you maintain supplemental traditional insurance coverage, you will have to pay income taxes on your HSA contributions.

If your eligibility status changes throughout the year, you must take that into consideration when calculating how much you can contribute to your HSA. If you contribute too much to your HSA, you will be subject to additional taxes and penalties.

Make appropriate distributions

If you use your HSA money to pay for anything other than a qualified medical expense, and you’re under the age of 65, you’ll have to add the amount you used to your taxable income on your tax return. Then you’ll have to pay an additional 20 percent tax penalty on that amount. If you’re unsure of what’s considered a qualified medical expense, the IRS offers this general guidance: HSA money should be used to pay for the cost of diagnosing, treating, preventing, curing or mitigating a disease or illness.

Watch out for itemized deductions

Since HSA contributions are pre-tax, you can’t include medical expenses that you paid for using HSA money in your itemized tax deductions. Make sure you record all medical expenses you paid for with your HSA so you don’t accidentally make this mistake.

Know state tax rules

A few states have different rules when it comes to taxing HSAs at the state level. Some states don’t treat HSAs as tax-deductible at the state level. So in those states your HSA contributions will be subject to state income tax and your HSA will be treated like a regular taxable brokerage account. Be sure to check the rules in your state to make sure you follow all tax and reporting regulations. In Tennessee and New Hampshire, HSA interest and earnings does count toward your overall dividend and interest income for the year. If you meet a certain threshold, this income is taxable and reportable, so make sure to check the law in your state to appropriately pay and report.

Stay current with your taxes

The IRS can levy your HSA in order to pay your outstanding tax bill. If they do, and you’re under the age of 65, you’ll have to pay a 20% tax penalty on the involuntary distribution. This is another of the many reasons why it is important to stay up-to-date on your tax payments.

Tax Forms

These are the tax forms you will need if you have an HSA. If you contributed and/or withdrew from multiple HSAs during the tax year, you may receive tax forms from each provider. If you did not make any contributions to or distributions from your HSA during the tax year you will not receive tax forms from your HSA provider(s).

1. W-2:

   This is the basic tax document you receive from your employer at the end of the year. It shows your taxable income and the taxes you’ve already paid. Any contributions that were withheld from payroll and deposited into your HSA will be shown in box 12 on this form. If you’ve made excess contributions to your HSA, and that excess amount hasn’t been added to box 1 of your W-2, you must report it as “Other Income”.

2. Form 5498-SA:

   You’ll receive this form from your HSA administrator, and it shows how much money you, your employer, and/or a third party contributed to your HSA over the course of the year. You do not need this form to submit your tax return. An example of IRS Form 5498-SA is available on the IRS website. This is anticipated to be available by May 31 each year.

3. Form 1099-SA:

   You’ll also receive this form from your HSA administrator, and it shows the distributions you’ve taken from your HSA over the course of the year. Box 1 will show the total amount you’ve used. If you’ve only used the money for qualified expenses, then box 3 will show the distribution code “1”, which means all distributions were tax-free. If you see the distribution code “5” in box 3, that means you didn’t use all of your distributions for qualified medical expenses and you’ll have to report the excess on your tax return. An example of IRS Form 1099-SA is available on the IRS website. This is anticipated to be available by January 31 of each year.

4. Form 5329:

   If you’ve made excess contributions to your HSA, you should use this form to calculate the extra taxes you owe. IRS Form 5329 is available on the IRS website.

5. Form 8889:

   This is the form you should attach to your personal tax return (Form 1040). Complete it by inputting all of your HSA contributions for the year as well as any additional taxes for which you’re responsible. IRS Form 8889 is available on the IRS website.

Need a checklist for all of these forms?

Save our Free HSA tax checklist so you're not caught unprepared during tax season.

HSAs, telehealth, and the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020 to provide economic relief from the impacts of the COVID-19 pandemic. The CARES Act included many policies intended to provide economic relief to people, including stimulus payments and the paycheck protection program. What many people may not realize is that it also provided some new changes to HSAs that may benefit you. That means you may make contributions up to the maximum IRS contribution limits to your HSA for the tax year 2024 at any time up to April 15, 2025.

Updated telehealth coverage

At the end of 2022, the United States government extended the safe harbor for the absence of deductibles for telehealth. This means that an HSA-eligible health plan can continue to waive the deductible to cover telehealth visits without jeopardizing participants’ eligibility to make pre-tax deductions into their HSA, depending on when the plan year started. Telehealth remains an eligible HSA expense for all account owners, meaning you can still use your HSA to pay for your share of telehealth visits. This applies to plan years beginning on or before December 31, 2021, or after December 31, 2022, and through December 31, 2024.

Understand Contributions

It’s important to contribute funds to your HSA correctly so you can take advantage of all the tax benefits of your HSA.

How to contribute to your HSA

How you contribute to your HSA depends on how you get your health insurance. If it’s administered through an employer, then you would enroll in the HDHP and the corresponding HSA. You would then select how much you would like to contribute each month or out of each paycheck (depending on how you’re compensated) and your employer would deduct that amount from your paycheck each month on a pre-tax basis. Your employer then sends your contributions to the HSA administrator.

If you purchase an HDHP on your own, you would also set up an HSA on your own. You would enroll in a HDHP and then set up an HSA with an administrator of your choice. You would contribute to the HSA by sending money to the administrator over the course of the year or in a one-time payment. If you set up an HSA on your own, you will deduct your contributions from your taxable income when you file your taxes.

Contribution limits

The IRS ties contribution limits to the consumer price index so they change on a yearly basis. In 2024, contribution limits for HSA-eligible account holders are: $4,150 for individual coverage and $8,300 for family coverage. In 2025 those limits will increase to $4,300 for individual coverage and $8,550 for family coverage. In addition, the catch-up contribution for those 55 and older will remain at $1,000 per person.

Changing the amount you contribute

If you decide mid-year you want to change the amount you’re contributing to your HSA, you must contact your plan administrator. If you arranged for your HSA through your employer, contact your HR department. If you arranged for your HSA on your own, contact the HSA administrator directly.

Who owns your contributions?

You do. Even if your employer is also adding money to your account. This means if and when you leave your place of employment, you get to take the full balance of your HSA with you.

The Last Month Rule

When making contributions to your HSA, a situation to be wary of is the Last Month Rule. The Last Month Rule is an allowance the IRS makes for people who become eligible to contribute to an HSA by December 1st. If this happens, they are allowed to contribute up to the maximum allowable amount for that year, as if they had been eligible for an HSA the entire 12 months.

The caveat is, if you take advantage of the last month rule, you must remain eligible to contribute to your HSA for the entire following year. If you don’t remain eligible, a portion of the initial December contributions will be deemed an “over-contribution” and subject to income and excise tax. If you become eligible for an HSA this December and contribute the maximum amount, but lose that eligibility sometime next year, here’s how the IRS would calculate the “over-contribution”:

The Last Month Rule

Because of the specifications stated previously by the Last Month Rule, this chart details how the IRS would analyze your HSA if you chose to max out your account in December. In the event that you suddenly become ineligible for an HSA within the next year, the IRS will consider what is deemed the over-contributed amount from your HSA as untaxed income.

Understand Distributions

How you access your HSA money depends on your plan administrator. Generally speaking, there are two main ways to distribute your funds: Debit card and reimbursement.

HSA Debit Card

An HSA debit card provides the most direct access to your contributions. It allows you to pay for your qualified medical expenses at the point of sale and shifts the financial burden from your personal accounts (e.g. checking or credit card) to the HSA account. It also negates the need for paperwork. If your HSA plan administrator offers a debit card, it is a convenient and easy option to use to pay for qualified expenses.

Reimbursements

In this scenario, you pay for your qualified medical expenses with your personal account (e.g. checking account or credit card) and then submit the bill and proof of payment to your HSA administrator. If you used a credit card to pay for the expense, it’s important to submit for reimbursement quickly so that you don’t run the risk of having to pay credit card interest for something that’s supposed to be a tax-free purchase. The reimbursements from your plan will come either in the form of a check or direct deposit.

Some rules on HSA distributions:

1. Distributions must be used for qualified medical expenses if you are under the age of 65. If you use the money for anything other than qualified medical expenses, you will not only pay income tax on the misused money, but you will incur an additional 20% penalty tax. If you’re over the age of 65, you can use your HSA contributions for whatever you want without a penalty, but non-qualified expenses will still be subject to income tax.

2. You can use your HSA money to pay for qualified medical expenses for: you, your spouse, your children, anyone you claim as a dependent (this could include your parents), and anyone you could have claimed as a dependent this tax year but weren’t able to because they either filed a joint tax return or were claimed as a dependent on someone else’s tax return.

Disclaimer: the content presented in this article is 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.