HSA’s provide unparalleled tax benefits to those who are eligible to contribute to them.  They can also be a useful investment vehicle for covering the costs of health care now and in retirement. 

What is a Health Savings Account?

An HSA is a tax-advantaged account that allows people who are covered by a qualifying high deductible healthcare plan to save for medical expenses.  These plans charge lower monthly premiums but you will pay more for the cost of service before the insurance company starts to pay a share of the expense.  If your out-of-pocket costs remain low, a high-deductible plan can save you money.

Are The Accounts Only Offered By Employers?

HSA’s can be opened through your employer or privately through an investment company offering the accounts.  Employers who offer HSAs typically contribute some money to the account on your behalf.  Regardless of who contributes to the account, the amount is always fully vested.

Unlike Flexible Spending Arrangements and Health Reimbursement Accounts, HSAs do not have “use it or lose it” provisions, meaning that if you do not spend down the money contributed by year-end, it is not forfeited.  Moreover, if you leave your employer the account can be rolled over to a private HSA in your name.  Whether you can continue contributing to the account after you change jobs will depend on the healthcare plan you enroll in moving forward.

Who Can Contribute?

If you are enrolled in a HRA or FSA, you are generally ineligible to contribute to an HSA.  Enrolling in Medicare makes you ineligible as well.  You also cannot be claimed as a dependent on anyone else’s tax return.  Additionally, the IRS requires individuals to be enrolled in a high-deductible healthcare plan that meets the following criteria: 

For Calendar Year 2021 

Individual Coverage 

Family Coverage

Minimum Annual Deductible $1,400 $2,800
Maximum Annual Out-Pocket Expense $7,000 $14,000


When you sign up for health insurance coverage, the policy documents typically identify whether the plan is HSA eligible or not.  In situations where couples maintain separate healthcare policies, the plan that each individual is covered by determines the eligibility for each spouse. 

How Much Can Be Contributed?

The amount you can contribute to an HSA is generally based on the number of months you were enrolled in a high-deductible healthcare plan.  In 2021, the IRS contribution limits are as follows:

  • $3,600 for individuals
  • $7,200 for couples
  • $1,000 catch-up contribution per individual (if age 55 or older)

These limits apply to the total amount contributed to the account, which includes any amount your employer deposits on your behalf.  Contributions can be made up to the tax filing deadline, which makes HSA’s an excellent last-minute tax reduction strategy.

If you maintained coverage for all 12 months in a given year, you are eligible to contribute the full amount.  However, under the IRS “last-month rule”, individuals that were enrolled in a high-deductible healthcare plan by December 1 are also permitted to contribute the full amount, so long as they comply with the testing period requirements the following calendar year.

Individuals who are covered under a family healthcare plan may be able to contribute the full $7,200 to their own account, provided their spouse has no contributions in their own account for the year.  Conversely, if each spouse is covered under separate individual healthcare plans, each spouse is limited to contributing the maximum individual amount to their own HSA.

Can The Money Be Invested?

Money contributed to an HSA can remain in cash or it can be invested.  Generally speaking, the accounts usually offer a suite of mutual fund and/or ETF options from which you can choose.  How much you choose to invest should balance your need to cover current healthcare expenses against your goal of covering healthcare costs in the future.  If you opt to invest money held within the account, selecting an appropriate asset allocation will be the biggest determiner of the risk you assume and the potential growth you’ll experience.  Like other investment accounts, the costs of the funds should also be considered because what funds charge can have a dramatic effect on your returns over time.

What Are The Tax Benefits?

The HSA is the most tax-advantaged account available because it provides a triple tax benefit:


  • Contributions result in a tax deduction that reduces your current income.  The deduction is “above-the-line” meaning you are not required to itemize your deductions to receive the tax benefit.  If you contribute through payroll, your contribution also reduces the amount of income subject to Social Security and Medicare taxes
  • Earnings are tax-free while in the HSA. If you invest the money held in the account, you can make changes to your security selections without creating tax liability for yourself.  This is the same tax treatment for money that is invested in retirement accounts.
  • Withdrawals are tax and penalty-free at any age if the distribution is used to pay for qualified medical expenses. After age 65, distributions are not subject to penalties at all regardless of whether the amount withdrawn is used for a qualified medical expense or not.

What Are The Disadvantages?

Even with the three-fold tax benefits offered by HSAs, there are some disadvantages to be aware of:

  • If you contribute more than you are eligible in a given year, the excess contribution amount is subject to a 6.00% penalty for each year the amount remains in the account. You have until the tax filing deadline to withdraw the excess and the earnings thereof to avoid the penalty.  Additionally, earnings on excess contributions must be reported as income and will be subject to ordinary income tax and a potential tax penalty.

  • Before age 65, distributions that are used to pay for non-qualified expenses will trigger a 20% tax penalty. The amount withdrawn is also subject to ordinary income tax.  Expenses that avoid the penalty and taxation are defined by the IRS in Publication 502.  They include medical costs related to you, your spouse, and any dependents.  After age 65, the penalty on non-qualified expenses is eliminated but distributions are still subject to ordinary income tax.
  • You should keep the receipts of any medical expenses that were paid from withdrawals from your HSA. This will be necessary to prove that the expenses were qualified if you are ever audited by the IRS.


Health Savings Accounts provide a trio of tax benefits and is an excellent tool for investing money for retirement and the healthcare cost you will experience later in life.  If you would like to learn more about HSAs and how they can be utilized as a part of your overall financial plan, please contact us today. 

Chris Yeagle

Chris Yeagle

Principal & Financial Advisor - Honeygo Financial

Chris began his career as a financial advisor with Merrill Lynch where he developed retirement plans for hundreds of clients and helped those he served to simplify their strategies and manage their investments.  He is a graduate of the University of Baltimore’s Merrick School of Business and he holds a Master of Finance from Loyola University.  Chris and his family are life-long Marylanders, who enjoy traveling the country visiting new places and old friends.

Honeygo Financial is a registered investment advisory firm offering services in Maryland and in other jurisdictions where exempted.  All written content is for informational purposes only and should not be considered tax, legal, insurance or investment advice. Opinions expressed herein are solely those of the firm, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made as to its accuracy or completeness.