Health Savings Accounts
Health Savings Accounts (HSAs) are tax-advantaged accounts for paying qualified medical expenses, established under Internal Revenue Code (IRC) Section 223. Often called the account with a "triple tax advantage".
Eligibility
Must be enrolled in a High-Deductible Health Plan (HDHP) to contribute. Cannot contribute once enrolled in Medicare.
2025 HDHP definition:
| Coverage Type | Minimum Deductible | Maximum Out-of-Pocket |
|---|---|---|
| Self-only | $1,650 | $8,300 |
| Family | $3,300 | $16,600 |
Contribution Limits
| Year | Self-Only | Family |
|---|---|---|
| 2025 | $4,300 | $8,550 |
| 2026 | $4,400 | $8,750 |
| Catch-up (age 55+) | Additional $1,000 | Additional $1,000 |
Triple Tax Advantage
The "triple tax advantage" is the exam's defining phrase for HSAs:
- Contributions are pre-tax (payroll) or above-the-line deductible (if made directly)
- Earnings grow tax-free
- Qualified distributions are tax-free
Think of it this way: Money goes in tax-free, grows tax-free, and comes out tax-free (for medical expenses). No other account type offers all three benefits at once.
Qualified Medical Expenses
- Deductibles, co-pays, and prescriptions
- Dental care and vision care
- Certain over-the-counter items
Non-Qualified Withdrawals
- Before age 65: Ordinary income tax + 20% penalty
- After age 65: Ordinary income tax only, no penalty. Effectively functions like a Traditional IRA for non-medical expenses.
Exam Tip: Gotchas
- After age 65, non-medical HSA withdrawals = taxable income only, no penalty. Same tax treatment as a Traditional IRA.
Ownership and Portability
- Account is portable - belongs to the individual, not the employer; stays with the account holder if they change jobs
- HSA funds roll over indefinitely; no "use it or lose it" rule (unlike Flexible Spending Accounts)
- Can invest HSA funds in stocks, bonds, and mutual funds (similar to a retirement account)
- Cannot contribute to an HSA once enrolled in Medicare
HSA vs. FSA Comparison
| Feature | HSA | FSA (Flexible Spending Account) |
|---|---|---|
| Rollover | Unlimited rollover | Generally "use it or lose it" (employer may allow $640 carryover for 2025) |
| Portability | Yes - belongs to individual | No - tied to employer |
| HDHP required | Yes | No |
| Investment options | Yes (stocks, bonds, funds) | No |
| Contribution source | Employee and/or employer | Employee (employer may contribute) |
Exam Tip: Gotchas
- HSA triple tax = pre-tax contributions + tax-free growth + tax-free medical withdrawals. No other account type offers all three benefits simultaneously.
- FSA is tied to the employer. HSA is portable and belongs to the individual.