Health Savings Accounts 2024 Explained
Al Waller: We all know health care-related expenses add up! The good news is that if you’re looking for a way to save money while also enjoying significant tax benefits, then look no further than a Health Savings Account (HSA).
Welcome to ClearPath – Your Roadmap to Health & Wealth ℠. I'm your host, Al Waller. Joining me today is Mihaela Vincze, public health expert, for nonprofit Transamerica Institute®. In today's episode, she’ll be breaking down HSAs—what they are, how they work, and the benefits they offer.
Before we get started, I want to remind our listeners that we would love to hear from you and get to know what topics you’d like to hear about. Please drop us a line at [email protected].
It’s good to have you back, Mihaela.
Mihaela Vincze: It’s great to be back, Al!
Al Waller: So, let’s talk. What is an HSA? Can you give a quick definition to our listeners?
Mihaela Vincze: Sure thing. A Health Savings Account (HSA) is a type of tax-advantaged savings account that allows those with an HSA-eligible plan – or what is also referred to as a high-deductible health plan – to save money for medical expenses on a pre-tax basis. This means that the money that you contribute to your health savings account or HSA can be used to reduce your taxable income.
Al Waller: That sure is a benefit! Now, for those who may be wondering, what is a high-deductible health plan?
Mihaela Vincze: A high-deductible health plan (HDHP) is a health plan with lower monthly premiums but higher amounts of out-of-pocket expenses, such as deductibles and copayments. Quick reminder, the deductible is the amount you need to pay for covered health care services before your insurance starts paying. In order for a plan to be considered a high-deductible health plan in 2024, the annual deductible should be more than $1,600 for self-only coverage or $3,200 for family coverage, according to the IRS.
However, it's important to note – high-deductible health plans do cover preventative care before the deductible is met.
Al Waller: Okay, so to reiterate- to open an HSA, you need a high-deductible health plan.
Mihaela Vincze: That’s right.
Al Waller: Earlier, you mentioned that HSAs are tax advantaged. Can you speak on this more?
Mihaela Vincze: Yes. HSAs have three major tax benefits. Let me explain each of them to you.
Firstly, contributions made to HSAs are tax deductible, which means that you can make your contributions with pre-tax dollars, reducing your overall taxable income.
The second tax benefit is that HSAs offer tax-free growth. Unlike regular savings or investment accounts, the interest or capital gains within your HSA are not taxed.
Finally, the third tax benefit for HSAs is the tax-free withdrawals. This means that withdrawals that are used to pay for qualified medical expenses do not incur income taxes.
Al Waller: That’s wonderful and a great incentive for folks to consider an HSA. Now, earlier you mentioned that funds from an HSA must be used on “qualified medical expenses.” What do these expenses entail?
Mihaela Vincze: HSA funds can be used to pay for a wide range of medical expenses, which include deductibles, copays, prescriptions, and sometimes alternative medicine like acupuncture. You can also use HSA funds to pay for health-related necessities like sunscreen, contacts, and first-aid related items. I don’t know about you—but I purchase these types of items pretty regularly.
Al Waller: As do I! Now I’m sure listeners are wondering this, what happens if someone uses their funds for non-medical expenses?
Mihaela Vincze: It's important to use HSA funds only for qualified medical expenses to avoid penalties. If you withdraw money from your HSA for non-medical expenses before age 65, you will be subject to a 20% penalty in addition to regular income taxes. After age 65, you can withdraw money for non-medical expenses penalty-free, but you will still owe income taxes on the withdrawal.
Al Waller: I’m glad we covered this so listeners are aware that these funds really should be used on medical expenses. Now, this makes me wonder—how much could folks contribute to their HSAs annually?
Mihaela Vincze: Good question because there are annual limits to how much you can contribute to an HSA—which we should keep in mind may not be enough to cover all medical expenses. The HSA contribution limit for 2024 is $4,150 for self-only coverage and $8,300 for family coverage, according to the IRS. However, those 55 and older can contribute an additional $1,000 as a catch-up contribution—and in many cases, if both spouses in a married couple are 55 or older, they can make additional contributions depending on the specifics of their health plan.
The limits that I just described include contributions made by all sources – from the account holder or employee, an employer, or someone else who makes a contribution to the HSA.
Al Waller: Speaking of which— how much do employers typically contribute to an HSA?
Mihaela Vincze: Great question, Al. It varies by employer. Of course, an employer has to offer a high-deductible health plan to their employees, and part of that offering would include an HSA.
Many employers often make contributions to the HSA on the employee's behalf. Some just make a set dollar contribution to encourage employees to sign up for the HSA and start saving in it. Other employers may use incentives for employees to entice them to engage in healthier behaviors, and when they do, the employer makes a contribution. This includes offering programs like walking challenges, mindfulness activities, and more.
Al Waller: Getting money to get healthy—I like it! I’m also curious, and I’m sure some of our listeners may be, too. How does an HSA differ from a flexible spending account or FSA? They sound very similar to me.
Mihaela Vincze: FSAs are employer-sponsored and have a "use-it-or-lose-it" feature—which means that you must use funds within the plan year. HSAs, on the other hand, are individually owned, and funds can accumulate and grow year to year and can be used at any time, even if you change jobs or retire!
Al Waller: Thank you for clearing that up. And one question leads to another … Now, what happens to your HSA if you leave your job?
Mihaela Vincze: HSAs are portable. You may be able to leave it with your current provider and/or roll it over to a new HSA provider. And remember, you can make withdrawals for qualifying medical expenses at any time.
Al Waller: That sounds like great news. Thank you, Mihaela, for walking us through what HSAs are, how to qualify for them, what “qualifying medical expenses” consist of, and what the 2024 annual contribution limits are!
Mihaela Vincze: You’re very welcome, Al!
Al Waller: If you have comments, feedback, or topic ideas, please reach out to [email protected]. Don’t forget to hit that subscribe button so that you don’t miss an episode of ClearPath—Your Roadmap to Health & Wealth.
Until the next time, I’m your host Al Waller. Stay safe, be well, and thanks for listening.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being.
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ClearPath – Your Roadmap to Health & Wealth is produced by Transamerica Institute with assistance from WYPR.
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