Health Savings Account (HSA) Update

Eligibility Is Tied to High-Deductible Health Plans (HDHPs):
Only individuals enrolled in HDHPs (with 2025 deductibles of at least $1,650 individual / $3,300 family) are eligible. There are no income limits, but you can’t contribute once enrolled in Medicare.

Contribution Limits Are Rising:
In 2025, individuals can contribute $4,300 and families $8,550. These limits increase in 2026 to $4,400 and $8,750, respectively. Those age 55+ can contribute an additional $1,000 annually.

HSAs Can Function Like a Retirement Account After Age 65:
After age 65, withdrawals for non-medical expenses are taxed like a traditional IRA—with no penalties and no required minimum distributions (RMDs), offering continued tax-deferred growth.

So, what is a Health Savings Account, or HSA? An HSA is a tax- advantaged medical savings account established by Federal Law and first made available in January, 2004.  HSAs are designed as a long- term savings vehicle and a way to save for future medical expenses.  We consider HSAs as an important part of retirement planning for those who can participate.

HSAs are not available to everyone.  Although there are no income limits to contribute to an HSA, these accounts are available only to taxpayers who are enrolled in a high- deductible health plan (HDHP) and have no other health insurance coverage.  To qualify as a HDHP for 2025, the plan must have a minimum annual deductible of $1,650 for an individual, and $3,300 for a family.  Furthermore, the plan must have an annual out-of-pocket maximum of $8,300 for an individual and $16,100 for a family.

If you are eligible to contribute to an HSA in 2025, then you can contribute up to $4,300 if you have individual health insurance and $8,550 if you have family coverage.  These contribution limits will increase in 2026 to $4,400 for individuals and $8,750 for a family (and the deductible and out-of-pockets figures will change too).  Individuals age 55 and older can contribute an additional $1,000 annually as a catch- up contribution in both 2025 and 2026.

Provided all eligibility rules are met, retirees and those unemployed can contribute to an HSA. However, once you are enrolled in Medicare, you are prohibited from contributing to an HSA.

An HSA offers three separate tax benefits: (1) The funds contributed to an HSA are not subject to federal income tax in the year the contribution is made; (2) Assets within the HSA grow tax-free and; (3) Withdrawals tax-free if used for qualified medical expenses. Other advantages an HSA offers are portability (you, not your employer, own the account), there is no minimum deposit to open an HSA and an HSA typically offers a wide range of investment options. A final (and important) advantage is that HSA balances rollover from year to year and there is no time limit for spending the funds in the account.

HSA funds withdrawn prior to age 65 and used to pay for non- medical expenses are considered taxable income and subject to a 20% early withdrawal penalty. Also, keep in mind expenses can be audited so it is a good idea to keep receipts for all medical expenses paid for with HSA funds.

An overlooked advantage of an HSA is that at age 65 and beyond, an HSA is treated similarly to a traditional IRA, but with no required minimum distributions. Therefore, if you can fund medical expenses from a taxable account, the HSA funds can continue to grow tax deferred, and any distributions after the age of 65 for non- medical purposes are treated as ordinary income.

The popularity of low-premium HDHPs with young adults, who do not spend as much on health care as older adults do, make HSAs a great way to jumpstart preparation for future inflated health care costs.  I encourage any young adult new to the workforce to take advantage of the benefits an HSA has to offer in conjunction with, but not in place of, 401k contributions.

Feel free to reach out to your ACM Wealth Advisor if you have any questions.

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