A Health Savings Account (HSA) is a tax‑favored account used to pay or reimburse qualified medical expenses for the account beneficiary, spouse, or dependents. An HSA must be established with a qualified trustee and is available only to individuals covered by a High Deductible Health Plan (HDHP).

Eligibility Requirements

To be an eligible individual, all of the following must be true:

• Covered by an HDHP on the first day of the month
• No other health coverage (with limited exceptions)
• Not enrolled in Medicare
• Not claimed as a dependent on another taxpayer’s return

A taxpayer may still qualify even if a spouse has non‑HDHP coverage, as long as that coverage does not cover the taxpayer.

Last‑Month Rule

If covered by an HDHP on December 1, the taxpayer is treated as eligible for the entire year, provided they remain eligible during the testing period (December 1 of the tax year through December 31 of the following year). Failure to remain eligible triggers income inclusion and a 10% additional tax.

HSA Contributions

Any eligible individual may contribute. Contributions may be made by:

• The taxpayer
• An employer
• Family members or others

Total contributions cannot exceed the annual limit.

Contribution Timing

Contributions may be made:

• Anytime during the tax year
• Up to the return due date (April 15 for most taxpayers)

2025 HSA Limits

Tax Benefits

HSAs offer multiple tax advantages:

• Above‑the‑line deduction for contributions made by the taxpayer
• Employer contributions (including cafeteria plan contributions) are excluded from income
• Funds roll over from year to year
• Earnings grow tax‑free
• Distributions are tax‑free when used for qualified medical expenses
• HSAs are portable and stay with the taxpayer regardless of employment changes

Employee contributions made through a cafeteria plan are excluded from income and therefore not deductible on Form 1040.

Qualified Medical Expenses

Qualified medical expenses generally follow the rules for the medical and dental expense deduction, with key differences:

• OTC medications and menstrual care products qualify for HSA purposes
• Expenses incurred before the HSA is established do not qualify
• If funded by a rollover from an Archer MSA or another HSA, the establishment date is the original account date

Insurance Premiums

Premiums are not qualified medical expenses except for:

• Long‑term care insurance (subject to limits)
• COBRA continuation coverage
• Health coverage while receiving unemployment compensation
• Medicare premiums (other than Medigap) for individuals 65 or older

HDHP premiums never qualify.

High Deductible Health Plan (HDHP) Requirements

An HDHP must have:

• A higher deductible than traditional plans
• A minimum deductible (indexed annually)
• A maximum out‑of‑pocket limit (indexed annually)
• Premiums do not count toward out‑of‑pocket limits

Form 8889 Requirements

Taxpayers use Form 8889 to:

• Report HSA contributions
• Calculate the HSA deduction
• Report HSA distributions
• Determine taxable amounts and additional taxes

If the taxpayer (or spouse, if MFJ) received any HSA distributions, Form 8889 must be filed.

Taxable Distributions & Additional Taxes

Distributions not used for qualified medical expenses:

• Are taxable income
• Are subject to a 20% additional tax, unless the taxpayer:
  
  
  • Dies
  • Becomes disabled
  • Turns 65

Failure to Maintain Eligibility

If the taxpayer fails the testing period under the last‑month rule:

• Must include in income the portion of contributions allowed only because of the rule
• Amount is subject to a 10% additional tax