Key takeaways:
- Health Savings Accounts (HSAs) offer a triple-tax advantage and can serve as a long-term retirement savings tool, not just a way to cover current medical expenses.
- Employees can adjust HSA contributions at any time during the plan year, invest their balance once it meets a minimum threshold, and make catch-up contributions of $1,000 per year from age 55.
- At 65, HSA funds become more flexible: they can be used for non-qualified medical expenses without penalty, and they cover Medicare premiums, deductibles, copays, and coinsurance.
- Contributing over the annual limit triggers a 6% tax each year until corrected, so it’s important to track contributions carefully, especially when approaching Medicare enrollment.
As healthcare costs continue to increase, many people are experiencing financial strain. In fact, about half of U.S. adults say it is difficult to afford healthcare costs.
Health Savings Accounts (HSAs) have the potential to play an important part in healthcare financial planning, allowing pre-tax dollars to pay for qualified medical expenses and offering a way for people to keep their healthcare spending in check.¹
During Financial Literacy Month, HealthEquity emphasized the importance of HSAs by hosting a webinar on top 10 ways to use an HSA.
From maximizing the triple-tax advantage to using HSAs as a springboard for retirement savings, the session focused on helping people make the most of this financial resource.
Why are HSAs a popular savings tool for employees?
So, what drives people to enroll in an HSA? During the session, we surveyed around 2,600 HSA members and here is what they said were their main motivators:
- The ability to roll over funds year to year
- Free match or seed money from employers
- Building long-term savings for retirement
What is more, it is clear that members know HSAs are more than just a way to pay for current qualified medical expenses. Many also see HSAs as a long-term planning tool.²
Here is how respondents said they plan to use their HSA funds:
- Thirty-two percent plan to invest their HSA funds.
- Twenty-seven percent plan to save for long-term healthcare needs.
In this post, we'll explore the top 10 questions members raised during the webinar, sharing key insights to elevate your understanding of HSAs.
How can someone start investing their HSA funds?
Employees should first confirm they meet any required minimum cash balance before investing. HealthEquity's general investment threshold is usually between $1,000 and $2,000.
To start investing, they can:
- Log in to their HSA account
- Select the investment widget
- Use the investment desktop to choose and manage investments
Action you can take: During open enrollment, include a simple "When can I invest?" callout that highlights the minimum balance requirement and where to click.
What fees are associated with investing HSA funds?
According to Morningstar's 2023 annual HSA report, HealthEquity has the second most competitive total investment fees in the industry. HealthEquity investment fees may include:
- Monthly investment administration fees: 0.03% billed monthly on your average daily invested balance, capped at $10 per month even as your invested balance grows. To find this fee, check the monthly investing fee box on the investment dashboard in your online account.
- Fund-specific operating expenses: HealthEquity offers 31 Vanguard mutual funds with a comparatively low expense ratio. Most of the funds we offer are rated 4- and 5-star by Morningstar. Be confident that no matter your selection, you will be investing in high-quality funds.
Can someone use HSA dollars if they are enrolled in Medicare?
Yes. If someone is 65 or older, they can use existing HSA funds for qualified medical expenses for themselves, their spouse, and tax-qualified dependents. This includes Medicare premiums and out-of-pocket costs like deductibles, copays, and coinsurance.³
They will pay income tax on non-qualified purchases after 65.
Action you can take: Reinforce a simple message: Medicare enrollment stops contributions, not the ability to spend existing HSA dollars on qualified expenses.
When should someone stop contributing to an HSA if they are retiring or going on Medicare?
To maximize your HSA benefits leading up to retirement and Medicare enrollment, consider stopping HSA contributions at least six months before you apply for Medicare. When you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back more than your first month of eligibility. If you continue to make HSA contributions during this period, you may face a tax penalty.
Action you can take: Build a retirement benefits checklist that includes an "HSA contributions stop date" reminder tied to Medicare timing.
Can someone use an HSA for non-eligible expenses before age 65, and what changes after 65?
| If you use HSA funds for non-qualified expenses | What you will pay |
|---|---|
| Before age 65 | Income tax and a 20% penalty |
| After 65 | Income tax, no penalty |
Before 65, non-qualified expenses are subject to income tax and a 20% penalty. After 65, the penalty goes away, but income tax still applies if the expense isn’t qualified.
Action you can take: When employees ask if an HSA works like a retirement account, you can say, "It can, but you’ll get the best tax value when you use it for qualified medical expenses."
What qualified medical expenses can an HSA cover?
IRS Publication 502 provides a list of qualified expenses, from acupuncture to x-rays. Or check out our cheat sheet of commonly covered expenses. To find HSA-eligible products with ease, head over to hsastore.com to browse 2500+ items.⁴
Action you can take: Share a short list of "common qualified medical expenses" in your employee newsletter, then link to the deeper resources for employees who want specifics.
When is someone eligible to make catch-up contributions?
If an employee turns 55 by the end of the tax year, they can contribute an additional $1,000 each year, as long as they remain enrolled in an HSA-qualified health plan.
Action you can take: If you segment communications, send a targeted reminder to employees ages 54 to 56 so they don’t miss the opportunity.
Can someone change their HSA contribution amount during the plan year?
Yes. Unlike FSAs, HSAs let employees adjust contributions at any time during the plan year, as long as they stay within annual limits.
Action you can take: Pair this flexibility with life-event messaging. For example, remind employees they can adjust contributions ahead of a planned procedure or after a change in household finances.
What happens if someone contributes over the yearly maximum?
If an employee contributes more than the limit, they will have to pay a 6% tax every year until they fix it. They should consider taking out the extra amount or apply it to next year's contribution limit to avoid penalties.
Who can someone name as a beneficiary of their HSA?
Employees can name a spouse, children, other individuals, or a trust.
If a spouse is the beneficiary, they can treat the HSA as their own and continue using it for qualified expenses.
If the beneficiary is not a spouse, they must generally include the full value of the HSA as taxable income in the year the account owner dies.
Action you can take: Add HSA beneficiaries to your annual "benefits housekeeping" checklist alongside life insurance and retirement plan beneficiaries.
How do HSAs help employees build financial security?
In a time of rising expenses and economic stress, HSAs have the potential to stand out as a lifeline for financial security. By fostering a nest egg for healthcare needs, they can empower people to take control of their health and financial future.
Watch our HSA triple tax savings webinar to see the power of HSAs in action.
Frequently Asked Questions about Health Savings Accounts (HSAs)
References and disclosures
HealthEquity does not provide legal, tax or financial advice.
1HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-deductible with very few exceptions. Please consult a tax advisor regarding your state's specific rules.
2Investments made available to HSA holders are subject to risk, including the possible loss of the principal invested, and are not FDIC or NCUA insured, or guaranteed by HealthEquity, Inc. Investing through the HealthEquity investment platform is subject to the terms and conditions of the Health Savings Account Custodial Agreement and any applicable investment supplement. You should carefully consider the investment objectives, risks, charges and expenses of any mutual fund before investing. A prospectus and, if available, a summary prospectus containing this and other important information can be obtained by visiting the Vanguard website at vanguard.com. Please read the prospectus carefully before investing. Consult your advisor or the IRS with any questions regarding investments or on filing your tax return.
3This applies to Medicare Parts A, B, C, and D. Prescription drug premiums are only valid HSA expenses if they’re part of Medicare Part D.
4HealthEquity and the HSA Store are separate companies and are not responsible for each other's policies or services. When you make a purchase through HSA Store from a link on a HealthEquity site, we may earn a referral commission.
