How to Fund a Health Savings Account (HSA)

A Health Savings Account (HSA) offers a unique way to save for medical expenses with notable tax advantages. This specialized savings account allows individuals to set aside funds specifically for healthcare costs, providing a triple tax benefit: contributions may be tax-deductible, earnings grow tax-free, and qualified withdrawals are also tax-free. HSAs are designed to complement specific health insurance plans. The funds within an HSA remain with the account holder, even if they change jobs or health plans, and can be used for qualified medical expenses now and in retirement.

Eligibility for Contributions

To contribute to an HSA, an individual must meet specific criteria set by the Internal Revenue Service (IRS). The primary requirement involves being covered under a High Deductible Health Plan (HDHP) on the first day of the month for which a contribution is made. For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. Additionally, the out-of-pocket maximum, including deductibles, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Beyond the HDHP requirement, individuals must not have other health coverage that is not a high-deductible health plan, with certain exceptions like dental, vision, or accident insurance. Enrollment in Medicare disqualifies an individual from making HSA contributions, though existing funds can still be used. Furthermore, an individual cannot be claimed as a dependent on someone else’s tax return. Meeting these prerequisites is essential before any funding can occur.

Ways to Contribute

Funding an HSA can occur through several methods, offering flexibility for individuals to manage their healthcare savings. Individuals can make direct contributions from their personal bank accounts to their HSA custodian. These direct contributions are tax-deductible, even if the individual does not itemize deductions on their tax return. Account holders can often set up one-time or recurring electronic fund transfers.

Many employers offer the option of payroll deductions, allowing employees to contribute to their HSA on a pre-tax basis. Contributions made through a payroll deduction reduce the employee’s taxable income, as they are excluded from gross income. This method is often the most advantageous due to the immediate tax savings. Employers may also contribute directly to an employee’s HSA as part of their benefits package. These employer contributions are not included in the employee’s gross income and are reported on Form W-2, Box 12, with code W.

It is also possible for third parties, such as family members, to contribute to an eligible individual’s HSA. These contributions count towards the annual limit for the eligible individual. While these third-party contributions are not tax-deductible for the contributor, they still benefit the account holder. All contributions, regardless of the source, must be made in cash.

Contribution Limits and Timelines

The IRS sets annual contribution limits for HSAs, which depend on the type of HDHP coverage an individual has. For 2025, the maximum contribution for individuals with self-only HDHP coverage is $4,300. For those with family HDHP coverage, the limit is $8,550. These limits encompass all contributions made by the individual, their employer, and any third parties.

Individuals aged 55 and over are permitted to make an additional “catch-up” contribution of $1,000 annually. This allows older individuals to further boost their healthcare savings as they approach retirement. If both spouses in a family are 55 or older, each can make a $1,000 catch-up contribution, provided they have separate HSAs.

When an individual is eligible for an HSA for only part of the year, the contribution limit must be prorated. This means the maximum contribution is calculated based on the number of months the individual was HSA-eligible, typically on the first day of each month. However, if an individual is covered by an HSA-eligible HDHP on December 1st of a given year, they may be able to contribute the full annual amount under the “last-month rule,” provided they remain eligible through a testing period until December 31st of the following year. The deadline for making contributions for a given tax year is generally the federal income tax filing deadline, which is typically April 15th of the following year. This deadline applies even if an individual files for a tax extension; the contribution deadline itself is not extended.

Handling Overcontributions

Contributing more than the allowed annual limit to an HSA results in an excess contribution, which carries tax implications. The IRS imposes a 6% excise tax on the excess amount, applied annually for each year the overcontribution remains in the account. This penalty is in addition to the excess contribution not being tax-deductible. Any earnings attributable to the excess contribution are also subject to income tax.

To avoid these penalties, individuals should correct an overcontribution by removing the excess amount and any associated earnings before the tax filing deadline, typically April 15th of the following year. The removed excess funds, along with any earnings, must be reported on the individual’s tax return for the year the overcontribution occurred. If the excess contribution is not removed by the tax deadline, the 6% excise tax will apply.