Health savings accounts (HSAs) allow eligible taxpayers to set money aside, pretax, in an account that they can use for certain medical expenses. Recent data from the Consumer Financial Protection Bureau indicates a substantial growth in the number of HSAs in recent years. Taxpayers reportedly had around 36 million HSAs in 2023, with balances totaling more than $116 billion. HSAs are subject to annual contribution limits with adjustments for inflation. The IRS recently announced the new contribution limits for 2025. This article will discuss HSAs, highlighting their advantages and the recently revised contribution limits.
Congress first created HSAs in 2003, and they became available in tax year 2004. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added a new § 223 to the Internal Revenue Code (IRC) defining HSAs.
A taxpayer must be enrolled in a High Deductible Health Plan (HDHP) to be eligible for an HSA. As the name suggests, this is a healthcare plan with a higher deductible, but often with lower premiums. The insured must pay more out-of-pocket before the insurer begins paying benefits. An HSA provides tax-free funds to cover pre-deductible medical expenses.
Taxpayers may have more than one health insurance plan, but they must all be HDHPs. If a taxpayer has a plan that provides more coverage than an HDHP, they will not be eligible to open or contribute to an HSA. They may continue to use funds in existing HSAs.
Many financial institutions, including banks and credit unions, may offer HSAs. Taxpayers may open an account on their own, or their employer can create an account for them. Similarly, they may make their own deposits or have their employers take deposits out of their paychecks.
HSAs are similar to other health savings accounts, such as flexible spending accounts (FSAs), in many ways. Most of these accounts provide tax advantages and are limited to qualifying medical expenses. HSAs have some important differences, though.
Taxpayers may use HSA funds for “qualified medical expenses,” as defined by § 213(d) of the IRC. This may include:
The statute defines “cosmetic surgery” as a procedure that:
IRC § 223 sets various numerical limits for HSAs, but these are based on economic conditions in 2003. The statute gives the IRS the authority to adjust the limits every year to account for inflation and changes in the cost of living.
The statute’s definition of “high deductible” and the IRS’s adjustment are as follows:
| Calendar year 2004 | Calendar year 2025 | |
| Deductible, individual coverage | $1,000 | $1,650 |
| Total out-of-pocket expenses, individual coverage | $5,000 | $8,300 |
| Deductible, family coverage | $2,000 | $3,300 |
| Total out-of-pocket expenses, family coverage | $10,000 | $16,600 |
For calendar year 2004, the HSA contribution limits were $2,250 for an individual plan and $4,500 for a family plan. The statute also allows taxpayers who are at least 55 years old to contribute an additional amount, known as a “catch-up contribution.” This amount was $500 in 2004, increasing by $100 each year until 2009. It has remained at the level set by the statute for 2009, $1,000.
The 2024 and 2025 limits are as follows:
| 2024 contribution limits |
2025 contribution limits |
|
| Individual coverage | $4,150 | $4,300 |
| Family coverage | $8,300 | $8,550 |
| Catch-up contribution | $1,000 | $1,000 |
HSAs are an excellent way for taxpayers to build a tax-free reserve of funds for medical needs. Employers can promote employee health and satisfaction. Both can take advantage of tax benefits.
If you have any questions or would like additional information, please contact our team for an employee benefit plan audit to review, assess, and correct compliance issues.