Introduction

A Health Savings Account (HSA) is an individually owned account that can be funded on a pre-tax (or tax-deductible) basis and used for the qualified medical expenses of the account holder and eligible dependents on a tax-free basis. The maximum amount an individual can contribute to an HSA during a year is dependent upon the tier of High-Deductible Health Plan (HDHP) coverage in which the individual is enrolled (self-only or family) and the number of months the individual is HSA-eligible during the calendar year. HSA accounts often provide investment opportunities to account holders, subject to minimum account balance requirements.

It is important to remember that many of the issues addressed in this guide involve an individual’s tax-qualified status for HSA contributions. As a result, employers and individuals must work with their tax advisors when determining eligibility and limits for HSA contributions. Most of the information covered in this guide can be found in §223 of the Internal Revenue Code. However, additional IRS guidance is also referenced in the relevant sections of this guide.

Eligibility

HSA eligibility is determined on a monthly basis, which is important for determining what an individual’s maximum annual contribution will be (discussed later in this guide). HSA eligibility for a month is determined by verifying that the individual meets each of the above requirements as of the first day of the month. If the individual does not meet the requirements on the first day of the month but meets the requirements later on in the month, they are not HSA-eligible for the entire month. If an individual is HSA-eligible as of the first day of a month but fails to meet one or more of the requirements later in that same month, they are treated as HSA-eligible for the entire month.

If an individual is HSA-eligible, this means that they are eligible to make contributions to an HSA and receive employer contributions to an HSA. An individual is not required to be “HSA-eligible” to take tax-free distributions from their HSA. In other words, an individual who is no longer eligible to make or receive HSA contributions may still take distributions from their HSA to reimburse qualified medical expenses. Similarly, a spouse or dependent is not required to be HSA-eligible for an individual to take taxfree distributions for the spouse’s or dependent’s qualified medical expenses. In addition, if a spouse or dependent is enrolled in the HDHP with the individual, and the spouse or dependent is not HSA- eligible, this will not impact the HSA eligibility of the individual or the maximum amount the individual can contribute for the month.

Not Anyone’s Tax Dependent

The definition of tax dependent for purposes of determining whether an individual is eligible to establish an HSA account is not the same definition of tax dependent for purposes of determining whether the dependent’s eligible medical expenses can be reimbursed from an HSA account. The definition of tax dependent for purposes of determining whether an individual’s expenses can be reimbursed from an HSA account will be discussed later in this guide.

If an individual falls within any of the following categories, they are not eligible to establish an HSA:

• The individual is a taxpayer’s child who is under age 19 at the end of the tax year;
• The individual is a taxpayer’s child who is a student under age 24 at the end of the tax year; or
• The individual is a member of the taxpayer’s household (other than the taxpayer’s spouse) for whom the taxpayer provided over half of the individual’s support for the year and whose gross income does not exceed the inflation-adjusted income limit under the Tax Cuts and Jobs Act, which replaced the previous personal exemption amount beginning in 2018.*

*The inflation-adjusted income threshold for dependent status was $4,700 in 2023. For 2024, the gross income limitation for tax dependent status is $5,050.

Regulatory and Legislative Strategy Group