HSA Funding, Withdrawals, and Penalties
For people enrolled in a high deductible healthcare plan (HDHP), you either own a Health Savings Account (HSA) or hopefully are considering one.
HSAs provide participants with several significant tax advantages that can help make healthcare more affordable and save money on taxes. The accounts also give you the ability to better control your healthcare choices. With an HSA, as with any other medical savings account, it’s important to know how you can get the most out of the benefit.
HSAs offer triple tax advantages: tax-free contributions, tax-free distributions for qualified expenses, and tax-free interest and dividends. Here’s some important information on HSA funding, HSA withdrawals, and related penalties.
HSA Funding
First, let’s learn about HSA funding (AKA contributions). Each enrollment season, you decide how much you want to put in your HSA. For 2025, the maximum annual contribution limit is $4,300 for individuals and $8,550 for family. Keep in mind, you can change your HSA contribution for any reason at any time during the year.
Each payday, your employer will deduct the allotted amount of your contribution (divided equally throughout the year). The deduction happens before taxes, lowering your taxable income the first of the triple tax-advantages.
What if you don’t have automatic withdrawals through your employer? You can add funds to your HSA on you own, then file your contributions on your annual tax returns to get the tax break.
There is one other important note about HSA contributions. You must have a qualified HDHP to make contributions. You can no longer contribute funds to your HSA if your health insurance plan changes and you are no longer enrolled in an HDHP. However, you can keep the account and use the funds.
HSA Withdrawals and Penalties
HSA withdrawals (AKA distributions) are a little different. If the money is used for an eligible medical expense, then you pay NO TAXES on the distribution (the second triple tax advantage).
With a benefits debit card, you can pay for eligible expenses at doctor’s offices, pharmacies, or other approved places without having to pay out of pocket and then file a claim. Eligible expenses include co-pays and deductibles, prescription medications, and a long list of other healthcare needs. Read more about HSA eligible expenses.
If you don’t have a debit card, you’ll have to file a claim for reimbursement. Contact your HSA benefits administrator to learn more about filing a claim. Be sure to ALWAYS keep your receipts and other documentation so that you can prove that the distribution was for an eligible medical expense.
A couple of important notes about HSA distributions and penalties:
- If you withdraw the money for a non-qualified expense, you will pay income tax and a penalty on the non-qualified withdrawal amount
- If over age 65, you can take a distribution for ANY REASON and not pay the penalty; you will be taxed only on that amount as income.
Takeaways
HSAs are great tools for helping ease the financial burden of healthcare for account holders and their dependents. Be sure to keep the distributions and penalties rules in mind; this can help you make the most of your hard-earned dollars and the associated tax-free advantages of an HSA.