Now that “Tax Day 2024” is nearly behind us, it’s a good time to explore the tax benefits that a Health Savings Account (HSA) offers you and your employees. An HSA offers what some call a unique “triple tax benefit”:
- Contributions reduce a participant’s taxable income;
- Interest earned (investment growth) within an HSA is tax-free;
- Qualifying withdrawals for medical expenses are tax-free.
That means expenses you and your employees pay for deductibles, copays, prescription drugs, vision care, and dental care can all be paid from or reimbursed from funds in an HSA.
Funds used for non-medical purposes are considered taxable income and are subject to an added 20% tax. After age 65, the added tax no longer applies, but you will owe taxes on any non-medical withdrawals.
A fourth benefit of an HSA is that HSA balances roll over at the end of the year (year after year). There is no “use it or lose it” provision like with a Flexible Spending Account (FSA). If you don’t use all of the HSA funds contributed, those funds are available for use next year (or in other years ahead).
HSA Contribution Limits
To be eligible to contribute to an HSA, you and/or your employees must be enrolled a High Deductible Health Plan (HDHP). Contribution limits change annually; the table below shows the 2023 and 2024 limits. Amounts this year are up about 7% as compared to 2023 due to inflation.
| Year | Self-Only HDHP | Family HDHP | Catch-Up Contribution (Additional contribution for those ages 55+) |
| 2023 | $3,850 | $7,750 | $1,000 |
| 2024 | $4,150 | $8,300 | $1,000 |
According to the Internal Revenue Service (IRS), an HDHP for 2024 must have an annual deductible of at least $1,600 for self-only coverage and $3,200 for family coverage. Out-of-pocket expenses cannot exceed $8,050 for self-coverage or $16,100 for family coverage.
If you or your employees enroll in an HSA at a time other than your annual open enrollment period, the annual contribution limits are prorated. Just divide the annual contribution limit by 12 and multiply that amount by the number of months you are eligible.
If you exceed the annual HSA contribution limits set by the IRS, the excess amount is subject to regular income tax. An excise tax of 6% also applies to any amount over the contribution limit. If you withhold more than allowed, your mistake can be corrected if done before the federal tax filing deadline. Be sure to consult your tax professional for details.
For more information about HSAs and other tax-favored health plans, refer to IRS Publication 969.
CaliforniaChoice offers multiple HSA-qualified health plans as part of its portfolio. Talk with your broker about the plans available in your service area. If you don’t already have a broker, we make it easy to search for one.
