Medical expenditures may be quite costly. However, two special accounts, the health savings account (HSA) and the health flexible spending account (FSA), can help with both your doctor’s and tax expenditures.

As with all taxes, there are exceptions and particular regulations for certain situations.

What is a health savings account (HSA)?

A health savings account (HSA) is an account that may be used to pay for a range of medical expenses. An HSA is only available to those with high-deductible health insurance plans. Contributions to an HSA are tax deductible, and returns (if invested) are tax-free, as are withdrawals for qualified medical costs.

The maximum amount you may contribute to your HSA is also determined by inflation and the type of high-deductible health coverage you own.

2023 HSA contribution limits

In 2023, individuals with a qualifying individual high-deductible health plan may contribute up to $3,850 to an HSA. Family donations were limited to $7,750.

According to the IRS, high-deductible health plans for 2023 must have an annual deductible of at least $1,500 for solo coverage and $3,000 for family coverage to be considered eligible. Out-of-pocket payments are limited to $7,500 for individuals and $15,000 for families.

Self	Family	Catch-up contribution (ages 55+)
$3,850.	$7,750.	$1,000.

 

2024 HSA contribution limits

Due to strong inflation, the IRS considerably increased the HSA contribution amounts for the 2024 calendar year. Individuals may contribute up to $4,150 in 2024, up $300 from 2023. The family contribution level for 2024 increased to $8,300, up $550 from 2023.

According to the IRS, a high-deductible health plan for the 2024 tax year must have an annual deductible of at least $1,600 for single coverage and $3,200 for family coverage. Out-of-pocket expenditures may not exceed $8,050 (single) or $16,100 (family).

Self	Family	Catch-up contribution (ages 55+)
$4,150.	$8,300.	$1,000.

What is a flexible spending account (FSA)?

A health flexible spending account (FSA) is a workplace account that allows you to pay for some medical expenses out of pocket, such as insurance copays, medications, and other things required to fulfill your health plan’s deductible. You contribute to the account through payroll deductions, and in exchange, the IRS agrees not to tax that percentage of your paycheck.

Note that some workplaces also provide dependent care flexible spending accounts (DCFSAs), which differ from health FSAs. DCFSAs can help with the expense of childcare, preschool, and elder care.

FSA contribution limits 2023 and 2024

The IRS determines the maximum FSA contribution limit each year based on inflation. In 2023, the FSA contribution ceiling was $3,050, or approximately $254 per month. In 2024, the maximum FSA contribution is $3,200, or $266 per month.

How do HSA and FSA contributions work?

HSA contributions

• If your health savings account is based on a high-deductible health plan provided by your company, your employer may set up payroll deductions on your account, allowing funds to be deposited tax-free.
• If you make HSA payments directly, you may be eligible to deduct the amount when you submit your taxes. You do not need to itemize to obtain the HSA deduction.
• If you’re searching for a last-minute solution to reduce your tax burden, remember that you have until the yearly tax filing deadline (April 15, 2024) to contribute to an HSA for the previous tax year.

 

FSA contributions

Once you set up your flexible savings account at work, contributions are automatically deducted from your paycheck and deposited into your account each pay period.

The money is contributed before tax, so your payroll tax bill will be lower.

How do I access the money in my FSA or HSA account?

• With an FSA, you generally use a debit card linked to the account, or you pay out of pocket and then submit receipts to the FSA administrator to be reimbursed. Using an FSA debit card is typically easier, but keep in mind that you may be required to show receipts to confirm that your transactions were for qualified medical costs.
• With an HSA, you will most likely obtain a debit card that is connected to your HSA account. Along with other annual tax forms, your HSA manager will send you a Form 1099-SA that shows account distributions. Keep receipts and proof of what you spent the money on in case the IRS challenges your tax claim.

What if I don’t use all the money?

Health savings accounts (HSAs)

HSA savings are yours—there are no withdrawal deadlines, even if you no longer have the same high-deductible health plan. You may also invest your HSA assets in mutual funds or other securities, allowing them to grow tax-deferred and be utilized tax-free to pay for eligible medical expenditures whenever needed.

Use HSA funds for medical purposes, however. If you are under 65 and use the funds for other purposes, the money becomes taxable income, and you may be subject to an extra 20% tax on nonmedical HSA expenses.

Once you reach the age of 65, you can utilize HSA funds for any purpose, but withdrawals that are not used to cover medical expenditures will be taxed.

Flexible spending accounts (FSAs)

The primary disadvantage of an FSA is that it is a use-or-lose plan. If you have a healthy year and have money left in your FSA at the conclusion of the benefits period, your employer will get the extra money. Some things to remember:

• Rollovers: Some employers enable employees to roll over a part of their unused funds into the next year’s account. The IRS limits FSA rollovers to $610 in 2023 and $640 in 2024.
• Grace period: Some employers give employees a few months to use FSA money from the previous year, although they are not compelled to. Grace periods often last until mid-March.