How Much to Contribute to a Health Savings Account?

Health Savings Accounts (HSAs) offer a tax-advantaged way for individuals to save and pay for qualified medical expenses. Designed to complement high-deductible health plans (HDHPs), HSAs allow account holders to accumulate funds for healthcare costs on a tax-favored basis. Understanding contribution rules is a crucial step in leveraging this financial tool, helping individuals prepare for medical expenditures and potentially reduce taxable income.

Eligibility for Contributions

To contribute to an HSA, an individual must be covered by a qualifying High-Deductible Health Plan (HDHP) and meet Internal Revenue Service (IRS) criteria. For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. Annual out-of-pocket expenses, including deductibles and co-payments but not premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Certain conditions can disqualify an individual from contributing to an HSA, even with an HDHP. For instance, being covered by another health plan that is not an HDHP, such as a general-purpose Flexible Spending Account (FSA), makes an individual ineligible. Limited-purpose FSAs for dental or vision expenses are permissible. Individuals enrolled in Medicare (Part A or B) or those claimed as a dependent on someone else’s tax return are also ineligible.

Understanding Contribution Limits

The Internal Revenue Service (IRS) establishes annual limits on HSA contributions. For 2025, the maximum contribution for self-only HDHP coverage is $4,300. Those with family HDHP coverage can contribute up to $8,550. These limits encompass all contributions made to the account, regardless of the source.

Individuals aged 55 and over can make an additional “catch-up” contribution of $1,000 annually beyond the standard limits. If both spouses in a family coverage plan are 55 or older and wish to make a catch-up contribution, each must establish their own separate HSA.

Employer contributions to an employee’s HSA count towards the individual’s annual contribution limit. If an employer contributes, the employee’s personal contribution is reduced by that amount. For example, if the self-only limit is $4,300 and an employer contributes $1,000, the individual can only contribute an additional $3,300. The combined total from all sources must not exceed the IRS-mandated limit.

Contribution limits may be prorated if an individual is not HSA-eligible for the entire calendar year. The maximum contribution is calculated based on the number of months the individual was eligible. A “last-month rule” allows individuals who become HSA-eligible by December 1st to contribute the full annual limit for that year. This rule requires the individual to remain HSA-eligible through December 31st of the following year; failure to do so can result in untaxed excess contributions becoming taxable income, along with a 10% penalty.

Contributions made to an HSA are generally tax-deductible or made on a pre-tax basis. Contributions made through payroll deductions are excluded from gross income and are not subject to federal income tax or payroll taxes like Social Security and Medicare. If contributions are made directly to an HSA provider outside of payroll, they can be deducted on the individual’s federal income tax return, even if they do not itemize deductions.

Making and Managing Contributions

Contributing to an HSA depends on whether contributions are made through an employer or directly. Many employers offer payroll deductions, automatically withheld from an employee’s paycheck before taxes are calculated. This pre-tax arrangement deposits funds into the HSA prior to income and payroll taxes, providing immediate tax savings. Employees arrange these deductions by contacting their human resources department or benefits administrator.

Individuals can also make direct contributions to their HSA provider. This can be done through electronic transfers or by mailing a check. When making direct contributions, individuals are responsible for tracking these amounts to ensure they do not exceed the annual limits. These direct contributions are tax-deductible and can be claimed on the individual’s tax return.

Managing contributions is necessary to avoid exceeding annual limits and incurring penalties. If an individual contributes more than the allowable amount, this is an excess contribution. To correct an excess contribution and avoid penalties, the excess amount, along with any earnings, must be withdrawn from the HSA by the tax filing deadline for that year. Failure to remove the excess by this deadline can result in it being subject to income tax and a 6% excise tax for each year it remains in the account. Individuals should contact their HSA provider to initiate the withdrawal process.

Maintaining accurate records of all HSA contributions, including those made by an employer, is essential for compliance. This tracking helps ensure total contributions remain within IRS-mandated limits and simplifies the tax reporting process. HSA providers furnish annual statements summarizing contributions, which can be used to verify amounts and prepare tax returns.