How Health Savings Account Rules Change Over Time

Participation in a high-deductible health plan, or HDHP, means you may be eligible to open a health savings account, or HSA. These tax-sheltered accounts are growing in popularity, and it's important to understand all the HSA rules because they shift as you age or reach certain lifestyle milestones.

As of mid-2023, nearly 36 million accounts held $116 billion in HSA assets—a year-over-year increase of 6% for accounts and 17% for assets.¹

General tips

• Contributions are tax-free up to a certain limit that is usually revised annually.
• Withdrawals spent on medical expenses are tax-free.
• Until age 65, withdrawals for nonmedical expenses typically incur a 20% penalty on top of income taxes.

What to expect along the way

Age 18: Eligibility begins

Once you turn 18, you're eligible to open and contribute to an HSA if:

• You're enrolled in a qualifying HDHP, and this plan is your only medical insurance.
• No one else is eligible to claim you as a dependent on their tax return.

Adult children under 27: Dependent rules

• Tax-dependent children up to age 19—or 24 for full-time students—may use distributions from a parent's HSA for qualifying medical expenses.
• Non-tax-dependent children can't—this includes adult children through age 26 who still qualify for HDHP coverage on a parent's plan. Instead, they'll need to open and fund their own HSA.

Marriage: Separate HSAs

• Spouses can't have a joint HSA, even if they're both eligible individuals. However, you may use your HSA funds to cover your spouse's qualifying expenses.

Age 55: Catch-up contributions

• You may now contribute an extra $1,000 each year as a catch-up contribution.

Age 65: Medicare eligibility limits HSA contributions

• You'll become eligible for Medicare at 65 and, once enrolled, may no longer make HSA contributions without incurring IRS penalties, including a 6% excise charge. However, you may still withdraw and spend your HSA funds.
• Be careful if you apply for Medicare after age 65—Medicare Part A will apply retroactively for up to 6 months or to your birth month, which could make you liable for penalties on any HSA contributions you make during that time.

Age 65+: No more penalties

• After age 65, or if you're disabled, you may withdraw HSA funds to cover nonmedical expenses without the 20% penalty everyone else must pay. Just be aware that you'll still owe income tax on these withdrawals.

After death: HSA beneficiaries

When you open an HSA, you'll choose one of the following beneficiaries to take ownership of the account or its funds in the event of your passing:

• Your spouse: They may take over the HSA as their own.
• Someone other than your spouse: The HSA stops being an HSA, and its fair market value becomes taxable to the beneficiary.
• Your estate: The value of the HSA is included on your final income tax return.

Year-end rollovers

Any remaining HSA funds and accumulated interest may be carried over without limit from year to year.

No longer HSA-eligible: What happens to your balance?

If you no longer have an HDHP, you may still take tax-free distributions from your remaining HSA balance—for qualified medical expenses—until the account is depleted.

Approaching an HSA milestone?

We're always here to help with questions about managing your HSA investments.

¹ https://www.devenir.com/wp-content/uploads/2023-Midyear-Devenir-HSA-Research-Report-Executive-Summary.pdf