What Is Section 223? Health Savings Account (HSA) Rules
Section 223 of the tax code governs Health Savings Accounts. This overview explains the key IRS rules for managing your account and its tax benefits.
Internal Revenue Code Section 223 provides the legal framework for Health Savings Accounts (HSAs). This section of federal law authorizes the creation of these tax-advantaged accounts and sets the specific rules for their use. Understanding these regulations is important for anyone looking to use an HSA to manage healthcare costs, including who can open an account, contribution limits, and how funds can be used.
Eligibility for a Health Savings Account
To contribute to an HSA, an individual must be covered by a High-Deductible Health Plan (HDHP), which has a higher deductible than traditional insurance. 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.
The maximum out-of-pocket amount for an HDHP in 2025, which includes deductibles and co-payments but not premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage. These figures are adjusted annually for inflation. A health plan must meet these financial thresholds to be considered a qualified HDHP.
Beyond HDHP coverage, an individual cannot be enrolled in Medicare or be claimed as a dependent on another person’s tax return. The individual also cannot have other health coverage that is not an HDHP, though vision, dental, or disability insurance are permitted. Eligibility is determined monthly, and a person must meet these conditions on the first day of the month to contribute for that month.
Contribution Rules and Limits
The amount of money that can be contributed to an HSA each year is regulated by the IRS. For 2025, an individual with self-only HDHP coverage can contribute up to $4,300 to their HSA. For those with family HDHP coverage, the annual contribution limit is $8,550.
These limits apply to the total amount contributed to the account from all sources. This means that contributions made by an employer and the individual combined cannot exceed the annual maximum. For example, if an individual with self-only coverage has an employer contribute $1,000, the individual can only contribute an additional $3,300 for that year.
A provision for individuals age 55 or older permits an additional “catch-up” contribution of $1,000 per year, allowing those nearing retirement to save more. If both spouses in a married couple are over 55, each can make a $1,000 catch-up contribution, but they must do so in separate HSA accounts.
Tax Treatment of Contributions and Distributions
HSAs offer a triple-tax advantage. First, contributions are tax-deductible. Contributions an individual makes directly can be deducted from their gross income, while contributions made through an employer’s payroll are made with pre-tax dollars, lowering taxable income.
Second, the funds held within the HSA grow tax-free, as any interest or investment earnings are not subject to federal income tax. This allows the account to grow at a faster rate compared to a taxable investment account. The funds remain in the account and roll over year after year; there is no “use it or lose it” rule.
Third, distributions from the HSA are tax-free if used for qualified medical expenses (QMEs). QMEs are broadly defined by the IRS to include payments for doctor visits, prescription drugs, dental and vision care, and hospital services. A distribution for a non-qualified expense is included in the account holder’s gross income and is subject to an additional 20% tax penalty. This penalty is waived if the distribution is made after the account holder turns 65, becomes disabled, or dies, though the amount is still subject to regular income tax if not used for QMEs.
Reporting on Your Tax Return
All HSA activity must be reported to the IRS on an individual’s annual tax return using Form 8889, Health Savings Account (HSA) Contributions, Deductions, and Distributions. This form is a required attachment to Form 1040 for anyone who has any activity in an HSA for the year.
In Part I of the form, you report all contributions made to your HSA, including those from your employer, to calculate your allowable deduction. Part II is used to report all distributions you took from your HSA during the year and to determine if any portion is taxable.
You will use information from other tax documents, such as Form 5498-SA for contributions and Form 1099-SA for distributions, to complete Form 8889. The final calculations are then carried over to your main Form 1040.