IRS Guidelines for Your Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals with specific health insurance plans. Contributions are often tax-deductible, the funds can grow tax-free, and withdrawals for eligible healthcare expenses are also tax-free. This triple-tax advantage makes it an effective tool for managing healthcare costs. The account is portable, meaning it remains with you if you change jobs or leave the workforce, and the balance rolls over each year. Understanding the IRS rules that govern these accounts is necessary to use them effectively and avoid tax complications.

HSA Eligibility Requirements

To contribute to an HSA, an individual must meet several criteria established by the IRS. The primary requirement is being covered by a high-deductible health plan (HDHP) on the first day of a given month. For 2025, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage.

These plans also have a cap on total annual out-of-pocket expenses, which includes deductibles and copayments but not premiums. For 2025, this maximum is $8,300 for self-only coverage and $16,600 for family coverage. These figures are adjusted annually for inflation, so it is important to verify them each year.

You cannot have any other health coverage that is not an HDHP. This includes being covered by a spouse’s non-HDHP plan, Medicare, or a general-purpose Flexible Spending Account (FSA). If another taxpayer can claim you as a dependent on their tax return, you are ineligible to contribute to an HSA.

Certain types of additional insurance are permitted without jeopardizing HSA eligibility, including:

• Coverage for specific diseases or illnesses
• Insurance providing benefits for hospitalization
• Coverage for accidents or disability
• Dental, vision, or long-term care coverage

Contribution Rules and Limits

The amount of money you can contribute to an HSA each year is regulated by the IRS and depends on your type of HDHP coverage. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300. Those with family HDHP coverage can contribute up to $8,550. These limits apply to the total contributions made by you, your employer, or any other person on your behalf.

Individuals who are age 55 or older by the end of the tax year are allowed to make an additional “catch-up” contribution of $1,000 per year. This provision helps those nearing retirement bolster their healthcare savings. If both you and your spouse are 55 or older and have separate HSAs, you can each make a $1,000 catch-up contribution.

The deadline for making HSA contributions for a specific tax year is the same as the deadline for filing your federal income tax return, typically April 15 of the following year. This deadline does not include extensions, meaning you have until the original filing date to make prior-year contributions.

For those not eligible for the entire year, contributions must be prorated based on the number of months you were an eligible individual. An exception is the “last-month rule,” which allows you to contribute the full annual maximum if you are eligible on December 1st. This rule has a “testing period,” requiring you to remain HSA-eligible for the entire following calendar year to avoid taxes and penalties.

Guidelines for HSA Distributions

The purpose of an HSA is to pay for qualified medical expenses on a tax-free basis. The IRS defines these expenses in Publication 502, “Medical and Dental Expenses.” They include costs for diagnosis, cure, treatment, or prevention of disease. Common examples are payments to doctors and dentists, prescription medications, hospital services, and costs for medical equipment like eyeglasses or hearing aids.

Over-the-counter medicines are now considered qualified medical expenses and can be purchased with HSA funds without a prescription. Expenses that are merely beneficial to general health, such as vitamins, or cosmetic surgery are generally excluded unless medically necessary. Keeping detailed records, including receipts and explanations of benefits, is required to substantiate that all distributions were for legitimate medical costs.

Taking a distribution from your HSA can be done using a debit card linked to the account or by paying out-of-pocket and then reimbursing yourself. The financial institution that holds your HSA does not verify the eligibility of each transaction, so the responsibility falls on you to ensure the funds are used for qualified expenses.

Using HSA funds for anything other than qualified medical expenses has tax consequences. The amount of any non-qualified distribution must be included in your gross income and is subject to ordinary income tax, plus a 20% penalty tax.

Once the account holder turns 65 and enrolls in Medicare, the 20% penalty on non-qualified distributions no longer applies. These non-medical withdrawals will still be subject to ordinary income tax, similar to distributions from a traditional retirement account.

Tax Filing and Reporting Requirements

You must report all HSA activity on your annual tax return. This is done using Form 8889, Health Savings Account (HSA), which is attached to your Form 1040. Failure to file this form can result in the inability to deduct your contributions. Your HSA custodian will send you two important tax forms for this process.

Form 8889, Health Savings Account (HSA)

Part I of this form is for contributions. It walks you through the calculation of your allowable HSA deduction, which is then reported on Schedule 1 of your Form 1040. This section also helps determine if you have made any excess contributions, which are subject to a 6% excise tax for each year they remain in the account.

Part II of the form deals with distributions from your HSA. You report the total amount of distributions you received and specify how much of that total was used for qualified medical expenses. Any taxable portion is calculated here and carried to your Form 1040 as other income, along with any applicable penalties.

Form 1099-SA, Distributions

This form reports the gross amount distributed from your account during the year and is typically sent in January. You use the information from this form to complete Part II of Form 8889. It is a record of withdrawals, not a determination of whether they were for qualified expenses.

Form 5498-SA, HSA Information

This document reports the total contributions made to your account for the tax year. Because you can make prior-year contributions up until the April tax deadline, this form is often not sent until May. It serves as an informational record for you and the IRS, confirming the contribution amounts you reported on your tax return.