Health Savings Accounts (HSAs)

First, let’s start with the basics. As you likely know, an HSA (Health Savings Account) is a way to save pre-tax for medical expenses solely for those employees that are enrolled in a High Deductible Health Plan (HDHP). If you recall, a HDHP is a medical plan where the deductible must be satisfied first before the insurance and copays kick in (wellness visits are always covered though).

Because of this wrinkle, HDHPs typically have lower premiums vs traditional copay plans of the same deductible level. They are ideal for employees who need medical insurance “just in case” and don’t have a chronic condition or month-to-month prescriptions. Younger folks without dependents are a prime example. Since HDHPs have higher deductibles, an HSA helps the employee save for that rainy day (the minimum individual deductible by law for HDHPs is a relatively low $1,650 for 2025, but the average in practice is much higher).

Unlike Flexible Spending Accounts (FSAs), an HSA has no “use-it-or-lose-it” feature – the employee owns the account and its portable if the employee leaves the company or even loses access to the HDHP. This is an important distinction: the HDHP allows for contributions to the HSA in that year, but once those contributions are made those funds are owned by the employee forever even if the HDHP eventually goes away. Moreover, they can invest their contributions in the stock/bond/mutual fund market through their HSA provider. Think of it like a 401k for medical expenses. The maximum HSA contributions for 2025 is $4,300 for individuals and $8,550 for family coverage (regardless of if these contributions are from the employer or the employee).

With those fundamentals out of the way, here are nine things about HSAs that you may not have been aware of that make them extraordinarily unique:

1. TRIPLE TAX ADVANTAGED. There is no other tax-advantaged account out there as tax-friendly as an HSA, as it’s triple tax advantaged: funded with pre-tax dollars, tax deferred over the years, and tax-free if spent on eligible medical expenses. A 401k is taxed upon withdrawal; a Roth IRA is funded with post-tax dollars – only an HSA can tout this unique advantage. The limitation is the relatively low annual contribution limits and the requirement of needing an HDHP to enroll. But from a purely investment vehicle standpoint, this is one savings vehicle that you’ll want to contribute the max to for those eligible who can afford it.

2. KEEP THOSE RECEIPTS...FOREVER. Here is another great wrinkle that often goes unnoticed: there is no expiration date on when you need to submit those medical receipts for reimbursement. Some savvy savers keep their medical receipts over the decades and allow their HSA funds to compound in the market over the long term untouched. When it comes time to retire, they will draw upon those decades-old receipts to collect their HSA funds tax-free to help fund their retirement without impacting their tax bill. They are maximizing the advantages cited in #1 to the fullest!

3. I DIDN’T THINK OF THAT! This applies to your FSA as well. Qualified medical expenses aren’t just for your doctors’ visits and prescriptions. Many commonly used products also apply – items you can stock up on if the clock is ticking on your FSA: bandages, over-the-counter medicine, sunscreen…… There are even online stores that cater solely to FSA/HSA expenses to make it easy to use your funds.

4. LIMITED PURPOSE FSA. You can’t have both an HSA and an FSA at the same time – the government isn’t that generous! However, employees who use an HSA can utilize a Limited Purpose FSA (LPFSA) if provided by their employer/PEO. This LPFSA works the same as an FSA, with the same “use it or lose it” feature, however the funds can only be used for dental, vision and preventative care expenses only (no medical expenses). Still, it’s a nice extra bit of tax-free access for those already taking advantage of an HSA.

5. ONCE-IN-A-LIFETIME. You can roll over an IRA into an HSA in a “once in a lifetime” rollover. After age 65 you can take non-medical withdrawals penalty free (typically 20%), but it is still taxable – making it a de facto IRA. Again, if you’ve been saving your medical receipts all along this should be tax-free as well.

6. FICA TOO! “Pre-tax” contributions with an HSA/FSA aren’t just for federal/state income taxes, but FICA (social security and Medicare) as well – saving the employee an extra 7.65% up to the SS wage base. This means the employer is usually enjoying those same FICA savings on their share of the FICA tax for all HSA contributions - $765 on every $10,000 of contributions! Moreover, since a HDHP has lower premiums, the employer contribution towards those lower-cost plans will typically be lower. Another reason employers should tout the advantages of the HSA to their employees!

7. YOUR DEPENDENTS ALWAYS QUALIFY. Even if an employee has employee-only medical insurance and a corresponding employee-only HSA, the medical expenses of their direct dependents can still qualify for reimbursement in their HSA.

8. PREMIUMS ARE ELIGIBLE?! Unlike FSAs, HSAs allow for premiums of Long-Term Care policies, COBRA and Medicare to be a qualified tax-free expense. Usually, premiums are exempt as eligible expenses, so this can be a noteworthy and high-expense wrinkle.

9. GET YOUR OWN HSA. As long as they are enrolled in a HDHP (and aren’t in Medicare or claimed as another’s dependent), and individual can enroll in their own HSA in case their employer doesn’t provide one.

In summary, because of all these advantages I encourage all my business clients to offer their employees at least one HDHP for those employees who don’t expect to utilize the healthcare system on a routine basis, along with access to the corresponding HSA. All my PEO partners offer HSAs and handle the administration of those plans as well, and there are many open market HSAs available as well. HSAs are a worthy offering, and employees should be educated on their value.