Health Savings Account (HSA) Facts

October 15, 2025

Unlike Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) do not need to be emptied each year and can serve as a long-term investment vehicle. In fact, HSAs offer a very attractive ‘triple’ set of potential tax benefits: 1) federal tax-deductible and FICA-free contributions, 2) tax-free growth, 3) tax-free withdrawals for qualified medical expenses. Below are details on these tax benefits.

Federal Tax-Deductible & FICA-Free Contributions

To contribute to an HSA, one must be enrolled in an HSA-eligible high-deductible health plan, and must also:
- Not be enrolled in a health plan that is not an HSA-eligible plan, nor have a Full-Purpose Health Care Flexible Spending Account (FSA)
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
The HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution¹.
Like with 401(k)s and 403(b)s, the annual contribution limit is the total maximum contributions to the type of account, so this needs to be considered if employers are changed mid-year.
Any amount that an employer contributes to an employee’s HSA does count toward the contribution limit, unlike with 401(k)s and 403(b)s, where employer contributions are counted separately.
Like IRAs, an HSA can be backfilled for the prior tax year by 4/15. However, any contributions not made through payroll will not receive the benefit of being free of Social Security or Medicare taxes (FICA).
Each state and municipality has its own rules for deductibility of HSA contributions.

Tax-Free Growth

HSAs can be a very powerful tool if a client’s cash flow allows them to not touch their contributions and instead allow the balance to build up and grow for use later in life.
Believe it or not, there is no time limit on withdrawals for qualified medical expenses², so if you save a receipt now for your $200 eyeglasses, you could leave that $200 in the account to grow, then withdraw the $200 years down the road.
Typically, we see the majority of one’s HSA invested like a retirement account – more aggressively early on in one’s career, then shifting to being more conservative leading up to and during retirement.
- Any amounts with the potential to be used for near-term medical expenses can be left in cash within the account.
In states that do not recognize HSAs, any interest or capital gains earned may be considered taxable income in the current year [at the state level].

Tax-Free Withdrawals

The rules for being enrolled in an HSA-eligible high-deductible health plan (HDHP) do not apply at the time of withdrawal, only at the time of contribution. In other words, if you are no longer enrolled in an HDHP, you may still request tax-free withdrawals for qualified medical expenses.
For withdrawals from an HSA to be qualified, the key is to ensure that the amounts withdrawn match up with qualified medical expenses that have been incurred.
- A list of specific medical and dental expenses that are and are not considered qualified can be found in IRS Publication 502 and is also available on most HSA provider websites.
- In general, HSA funds can be used for copays, expenses applied to an individual’s deductible, co-insurance, and some dental, drug, and vision expenses.
- It is lesser known that certain medical insurance premiums can be qualified expenses, including:
  - Medicare Part A, B, C, and D
  - COBRA and other group healthcare continuation coverage
  - Long-term care insurance (limited amounts based on age)
  - Health insurance paid while receiving unemployment benefits
- The following premiums do not qualify as qualified medical expenses:
  - Medicare supplement (Medigap) policy
  - Marketplace health insurance
- As always, we suggest that your clients consult a licensed tax professional to verify which expenses do or do not count as qualified for purposes of HSA withdrawals.
After age 65, HSA holders can take withdrawals that are not for a qualified medical expense and not pay the typical 20% non-qualified withdrawal penalty. The withdrawals are taxable, however, if not used for qualified medical expenses.
As we stated above, non-taxable HSA withdrawals can be made for qualified medical expenses incurred in earlier years, as long as good records are kept in case this needs to be justified to the IRS.

¹ Fidelity Smart Money. “HSA contribution limits and eligibility rules for 2024 and 2025”, 23 January 2025.
² Long, Kelley, CPA/PFS. “9 facts about HSAs that might surprise your clients.” Journal of Accountancy, 24 January 2023.

Vicus Capital is neither a law firm nor a certified public accounting firm and no portion of the content should be construed as offering or disseminating specific legal or accounting/tax advice.

For Use with the General Public. Financial Planning and Advisory Services offered through Vicus Capital, Inc., a federally Registered Investment Advisor.

Categories: Financial Planning

Tags: Health Savings Account (HSA), HSA Benefits