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Health Savings Account

January 13, 2023

A health savings account (HSA) provides a tax benefit for amounts that are contributed and used to pay qualified medical expenses of the account beneficiary, his or her spouse, and dependents. Contributions to the HSA account generally are either deductible or excluded from income. Distributions made from the account are not included in gross income if they are used exclusively for qualified medical expenses. HSAs can be established by an employee through an employer’s cafeteria plan or by an individual outside the employment context.

Eligibility and Definitions

An individual is eligible to establish an HSA in any month if: (1) he or she is covered by high-deductible health plan (HDHP) on the first day of the month; (2) is generally not covered by any other health plan or enrolled in Medicare; and (3) cannot be claimed as a dependent on another taxpayer’s return.

In 2022, a HDHP for this purpose is a plan with (1) an annual deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and (2) an annual out-of-pocket expenses limit of $7,050 for self-only coverage or $14,100 for family coverage.


Contributions and Reporting

Cash contributions may be made to an HSA by the eligible individual, the individual’s employer, or any other person on behalf of the eligible individual. Contributions made by an individual outside the employment context are deductible as an above-the-line deduction in calculating adjusted gross income. Employer contributions to an employee’s HSA may be excluded from the employee’s gross income. The maximum amount that can be contributed for 2022 is $3,650 for self-only coverage or $7,300 for family coverage.


The maximum contribution amounts are adjusted annually for inflation. The maximum amounts for the calendar years 2022 and 2023 are as follows:

The contribution limit is increased $1,000 if the individual reaches age 55 by the end of the tax year. The annual limit applies to all HSAs of the eligible individual combined, and all contributions made by anyone to the accounts. Contributions cannot be made after the participant attains age 65 or is enrolled in Medicare.

An individual must report all contributions and distributions to their HSA on Form 8889. Additionally, the individual establishing the HSA is responsible for determining whether HSA distributions are used exclusively for qualified medical expenses and for maintaining adequate records to substantiate such usage.


Excess contributions

An individual will have excess contributions if the contributions to their HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by the individual’s employer are included in their gross income. If the excess contribution is not included in box 1 of Form W-2, the individual must report the excess as “Other income” on their tax return.

Generally, an individual must pay a 6% excise tax on excess contributions. Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is used to figure out the excise tax amount. The excise tax applies to each tax year the excess contribution remains in the account.

An individual may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if the following conditions are met:

  • Excess contributions were withdrawn by the due date, including extensions, of the individual’s tax return for the year the contributions were made.

  • Any income earned on the withdrawn contributions were withdrawn and included the earnings in “Other income” on the tax return for the ear the contributions and earnings were withdrawn.


Distributions from HSA

Distributions from the HSA for the account beneficiary can be used for qualified medical expenses. Qualified medical expenses include expenses incurred only to the extent they are not paid for by insurance or otherwise, for diagnosis, cure, mitigation, treatment, or prevention of disease; transportation primarily for and essential to such care; drugs; and qualified long-term care expenses. Nonprescription drugs, subject to limitations, are considered qualified medical expenses.

There is no time limit on when distributions must occur, and the account owner may defer to use it in later years for qualified medical expenses. Any amount distributed from an HSA that is not used exclusively to pay qualified medical expenses of the account beneficiary (or his spouse or dependents) must be included in the account beneficiary's gross income and can be subject to an additional 20 percent tax.

Death of HSA Holder

A beneficiary should be chosen at the time of setting up the HSA. What happens to that HSA when the individual die depends on the designated beneficiary.

If the individual’s spouse is the designated beneficiary of your HSA, it will be treated as the spouse’s HSA after the individual’s death.

If the spouse is not the designated beneficiary of the HAS:

  • The account stops being an HSA, and

  • The fair market value of the HSA becomes taxable to the beneficiary in the year in which the individual dies.

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