Recently, the House passed a significant tax package from Republicans, which contains provisions for expanding health savings accounts (HSAs). This package introduces the largest contribution increase ever for HSAs in the coming year, along with various other benefits.
Understanding Health Savings Accounts (HSAs)
Health Savings Accounts are a financial tool designed for individuals with high-deductible health plans to save for medical expenses. They are known for offering a triple tax advantage: contributions are made tax-free, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. However, some state taxes may apply.
Current Changes and Provisions
The new provisions in the proposed legislation aim to remove obstacles for lower-income individuals, enabling them to significantly increase their annual contributions. While it is good news for many, the need for immediate funds persists, as many HSA account holders often rely on these accounts for current medical expenses rather than long-term savings.
Eligibility and Contribution Limits
To contribute to an HSA, individuals must enroll in a high-deductible health plan (HDHP), which tends to have lower monthly premiums but higher deductibles. For 2025, the deductible will be at least $1,650 for individual coverage and $3,300 for family coverage.
Self-employment and Employer Contributions
Self-employed individuals or business owners are also eligible to open HSAs, provided they have a qualified HDHP. Furthermore, some employers may match contributions to HSAs, similar to retirement savings plans, allowing employees to accumulate funds that roll over year after year, regardless of changing employment status.
Withdrawal Rules and Penalties
Withdrawals not used for qualified medical expenses incur a significant penalty of 20%, in addition to applicable income taxes. However, individuals aged 65 and older are exempt from this penalty, allowing them to withdraw funds for any purpose, with income tax applied only to non-qualified expenses.
Key Provisions Starting January 2026
If the proposed legislation is signed into law, several important changes will take effect on January 2, 2026:
Increased Contribution Limits
The contribution limit for HSAs in 2025 will be increased to $4,300 for individuals and $8,550 for families. Additionally, individuals aged 55 and older can contribute an extra $1,000. Under the new bill, these limits will double to $8,600 for individuals and $17,100 for families, although phased-out contributions will occur based on specific income thresholds.
Combined Catch-Up Contributions for Couples
Currently, both individuals and spouses who reach 55 or older can increase their contribution limits by $1,000 for their respective accounts. New changes will allow both spouses to combine their contributions into one HSA, providing greater flexibility in managing their savings.
Flexible Spending Accounts (FSAs) Adjustments
Under existing regulations, individuals are prevented from contributing to an HSA if their spouse has a flexible spending account. However, this restriction will be lifted, increasing opportunities for couples to manage their healthcare savings more effectively.
Expanded HSA Qualifying Expenses
Currently, HSA funds are limited to qualified medical expenses. New rules will allow for more diverse expenses, such as gym memberships and fitness classes, up to a capped amount. Specifically, individuals would be able to allocate up to $500 a year for single taxpayers and $1,000 for joint filers for fitness-related expenses.
Concierge Medical Care Accessibility
The new legislation will also recognize Direct Primary Care (DPC) arrangements, often referred to as concierge healthcare plans. Fees for these services may become eligible for HSA payments, provided they do not exceed certain amounts, offering more avenues for healthcare financing.
Contribution Beyond Age 65
Individuals aged 65 and older who enroll in Medicare Part A will still be allowed to contribute to their HSAs. Previously, enrollment in Medicare triggered the cessation of HSA contributions, and this change provides retirees the opportunity for continued savings.
Rolling Over Funds
The new provisions will allow those newly enrolled in HDHPs to roll over existing funds from health FSAs into HSAs, providing more financing options for healthcare expenses incurred prior to establishing the HSA, albeit under specific conditions.
Inclusivity of New Health Insurance Plans
The new law will also broaden the types of health insurance plans eligible for HSAs. Specifically, individual market bronze and catastrophic plans will be designated as HSA-qualified HDHPs, ensuring a wider range of options for account holders.
Potential Impact and Considerations
It remains unclear how many Americans will utilize the increased contribution limits, especially since only about 11% of current HSA account holders contribute the maximum limit. Financial experts note that while many individuals find it challenging to save sufficiently for retirement while meeting daily financial responsibilities, the trend is shifting. An increasing number of account holders are exploring the retirement savings benefits associated with HSAs, particularly considering the rising out-of-pocket healthcare costs in retirement.
Recognizing Healthcare Costs in Retirement
As retirees are likely to face substantial health-related expenses, it is expected that the new legislation could motivate more individuals to use HSAs as effective retirement savings vehicles. Given that a 65-year-old might require up to $165,000 in after-tax savings to cover healthcare expenses throughout retirement, the potential to save through HSAs could provide significant financial relief.
Healthcare should be a top consideration as unexpected medical bills can lead to substantial financial burdens, emphasizing the importance of adequately preparing for health expenses in retirement.
