Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax‑advantaged savings account for individuals enrolled in a high‑deductible health plan (HDHP).

It allows you to save money pre‑tax to pay for qualified medical expenses.
The HSA is owned by the individual and may be funded by the employee, employer, or both.

Eligibility Requirements 

To contribute to an HSA, you must:

• Be covered by a qualified HDHP
•  Not have other health coverage
  (except permitted coverage, such as dental or vision)
•  Not be enrolled in Medicare
• Not be claimed as a dependent on someone else’s tax return

2025 Contribution Limits

• Self‑only coverage: Up to $4,300
• Family coverage: Up to $8,550
• Catch‑up contribution (age 55+): Additional $1,000

These limits include both employer and employee contributions.

Contributions over the limit may be subject to a 6% excise tax unless corrected by the tax filing deadline.

Self‑Only vs. Family Coverage

• Self‑only coverage
  HDHP covers only the account holder
• Family coverage
  HDHP covers the account holder and at least one other person
  (such as a spouse or child)

The coverage type determines the maximum annual contribution limit.

W‑2 Reporting Instructions

• Box 12, Code W
  Reports total HSA contributions made through payroll
  (employer contributions + employee pre‑tax contributions)

This amount is excluded from:

• Box 1 – Wages
• Box 3 – Social Security wages
• Box 5 – Medicare wages

Form 8889 (Required)

Form 8889 is used to report all HSA activity:

• Line 9: Employer contributions (from W‑2, Box 12, Code W)
• Line 13: HSA deduction
  → Transfers to Schedule 1 (Form 1040)

How HSAs Affect Taxes

HSAs offer triple tax benefits:

1. Contributions are tax‑deductible
   (or excluded from income if made by an employer)
2. Earnings grow tax‑free
3. Distributions for qualified medical expenses are tax‑free

HSA contributions reduce Adjusted Gross Income (AGI) and may lower overall tax liability.
Self‑employed taxpayers can deduct HSA contributions even if they don’t itemize.

Reporting Qualified Medical Expenses

• Qualified medical expenses are reported on Form 8889, attached to Form 1040
• If HSA funds are used for non‑qualified expenses, the distribution is:
  • Taxable as income, and
  • Subject to a 20% penalty

The 20% penalty does not apply if the account holder is:

• Age 65 or older
• Disabled
• Deceased