HSA vs FSA vs HRA
When it comes to saving for health care expenses, there are many options available for individuals. So, what differentiates HSAs? Unlike Flexible Spending Accounts (FSAs) and most Health Reimbursement Arrangements (HRAs), an HSA is owned by the individual, not the employer, which means the account remains with the participant even if employment changes or ends. Furthermore, HSAs maintain unused funds to the next year, unlike an FSA which typically carries a “use it or lose it” clause (although FSAs can have grace periods and other plan specific rules, such as limited rollovers). One less positive distinction is that HSA contributions are only allowed by those on eligible high-deductible health plans, while HRAs and FSA’s may be more flexible (only limited purpose FSAs are compatible with a High-Deductible Health Plan). More on this below.
How Does One Contribute to an HSA?
As stated, HSA eligibility is limited. In order to contribute to an HSA, an individual must be enrolled in a High-Deductible Health Plan and have no other disqualifying coverage which is detailed in IRS publication 969. In addition, the individual must not be claimed as a dependent on another person’s tax return nor be enrolled in Medicare.
If you are eligible for an HSA, contributions may be made by the individual, an employer, or both. However, the total aggregated contribution amount cannot exceed the annual limit set by the IRS. For 2026, the limit has increased to $4,400 for self-coverage, $8,750 for a family, and an additional $1,000 catch-up contribution for those 55 and older who are not enrolled in Medicare. One important note is that HSA eligibility is determined on a month-to-month basis, and individuals who gain or lose eligibility mid-year could be subject to a prorated contribution limit. Contributions can be made at any time during the year and even into the following year up to the federal tax filing deadline, typically April 15. So, if you haven’t maxed out your 2025 HSA Contribution limit ($4,300 for individuals and $8,550 for families) and you are eligible to contribute to an HSA, you may still have a few weeks remaining to contribute funds that can be deducted from your income for the 2025 tax year.
HSA Treatment and Qualified Medical Expenses
As previously mentioned, HSAs are often described as having a “triple tax advantage.” Contributions can either be manually deposited and then deducted from gross income or deposited via your employer with a pre-tax payroll deduction. Once funds are in the HSA, most HSA providers offer an array of investment options including mutual funds, ETFs and even individual stocks and bonds. Like other tax advantaged accounts such as a Roth IRA or 529 College Savings Account, the earnings from the investments are tax-deferred, allowing your account the opportunity to compound and grow without tax implications over time. Finally, distributions are tax-free if spent towards what the IRS defines as a qualified medical expense.
Walking around your local drugstore, you have most likely seen certain health-related products, such as Ibuprofen or Band-Aids, labeled as “HSA-eligible.” These labels indicate that the product will count as a qualified medical expense. In addition to over-the-counter products and medical equipment, qualified medical expenses generally include doctor and hospital services, prescription medications, dental and vision care, certain qualified long-term care services and insurance premiums, and Medicare premiums. Even though you can’t contribute to an HSA while enrolled in Medicare, an individual can use funds already in an established Health Savings Account to pay for Medicare premiums and qualified deductibles/copays. Medigap plans, however, are ineligible for tax-favored treatment from HSA distributions. If an ineligible distribution is taken, the distribution will be included in your gross income, and an additional 20% penalty will apply if the individual is under 65 years of age.
Investing in Your HSA
While investing the assets in Health Savings Accounts may seem obvious to some, according to a report by Devenir, only 46% of assets in Health Savings Accounts were held in investments. This data indicates that many individuals are letting their HSA funds sit in cash. While you may not want to invest soon-needed funds in risky investments, the actual investing part of the HSA may be a helpful option to consider. Some HSA plans offer mutual funds and exchange traded funds (ETFs), which may fit the goals of many individuals. However, mutual funds and ETFs have expenses and risks which must be considered. Most HSA providers offer short-term options, such as high-yield money markets, or short term treasuries, that may provide a return and still maintain liquidity for upcoming healthcare needs.
Different strategies for financial planning with an HSA
While you can certainly use an HSA to reimburse current medical costs, there are several different strategies from a planning perspective that are worth discussing. For example, some individuals choose to pay their current medical costs out of pocket, allowing their investments in their HSA the opportunity to grow. By the time they reach retirement, they could have a large sum saved up for medical expenses and long-term care, if their investments perform well. To illustrate using an example, if a 25-year-old invested $4,400 a year at the end of each year until they were 65, they would enter retirement with approximately $680,000 in their HSA, assuming a 6% average rate of return compounded annually. Being that healthcare costs are one of the leading retirement concerns, establishing a well-funded HSA for retirement could be part of the solution.
Another HSA strategy is called delayed reimbursement. Since the IRS has no time limit on requesting HSA reimbursement, some individuals will pay current medical costs now and save receipts for later. Then, when desired in the future, the individual can use the saved receipts to pull the money out of the HSA tax-free, as if it were a savings account. For this to work, meticulous records must be kept, and the qualified expense must not have been previously reimbursed.
HSAs After Age 65 and IRA-Like Flexibility
Another planning consideration is how a Health Savings Account functions after age 65. HSA funds may be withdrawn for non-medical expenses after age 65 without the 20% penalty that otherwise applies; however, those withdrawals will be subject to ordinary income tax, similar to distributions from a traditional IRA, as explained in IRS Publication 969 and under Internal Revenue Code §223. This structure allows an HSA to function as a flexible retirement planning tool.
In addition, the tax code permits a one-time, tax-free transfer from an IRA to an HSA, known as a Qualified HSA Funding Distribution. This provision is outlined in Internal Revenue Code §223(f)(4)(C) and further explained in IRS Publication 969. The transferred amount counts toward, and is limited to, the annual HSA contribution limit and requires the individual to remain HSA-eligible during the testing period following the transfer. While not appropriate for every situation, this strategy may allow certain individuals to reposition retirement assets into an account that can later be used tax-free for qualified medical expenses, as defined in IRS Publication 502.
Should You Use an HSA?
HSAs can be an effective planning tool, although they are not the solution for everyone. It does not align with all individuals’ current and long-term financial goals. In addition, a high-deductible health plan, as that is necessary for an HSA, may not be the optimal choice in an individual’s current stage of life. If you decide that an HSA may be right for you or are simply interested in learning more about HSA strategy, reach out to your wealth manager or financial planner at Howe & Rusling. We’d love to help explore HSAs and if it is the right solution for you, how to best utilize an HSA for your financial goals.
Disclosures: This material is provided for informational and educational purposes only and is not intended as tax, legal, medical, or accounting advice. The information discussed is general in nature and may not be appropriate for all individuals. Individuals should consult with their tax advisor, health insurance provider, or other qualified professional regarding their specific circumstances before implementing any strategy described. Howe & Rusling, Inc. is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. Health Savings Account (HSA) eligibility, contribution limits, qualified medical expense definitions, penalties, and other provisions referenced herein are based on current federal tax law, including Internal Revenue Code §223 and applicable IRS publications, and are subject to change. State tax treatment of HSAs may differ from federal law. The “triple tax advantage” of HSAs applies only when IRS requirements are satisfied, including eligibility rules, contribution limits, and qualified distribution standards. Distributions for non-qualified expenses may be subject to income tax and, if taken before age 65, an additional 20% penalty. Investment options within HSAs vary by provider. Investing involves risk, including the possible loss of principal. Returns are not guaranteed, and performance assumptions used in any examples are hypothetical and for illustrative purposes only. They do not represent actual client experiences or guaranteed outcomes. The hypothetical example illustrating long-term HSA growth assumes consistent annual contributions and a steady rate of return. Actual results will vary and may be higher or lower depending on investment performance, fees, contribution timing, eligibility, and other factors. Strategies such as delayed reimbursement, IRA-to-HSA funding distributions, and long-term investment approaches involve recordkeeping requirements and specific IRS testing rules that must be satisfied. These strategies may not be appropriate for all individuals. Advisory services are provided only pursuant to a written agreement with Howe & Rusling. For additional information regarding Howe & Rusling’s services and fees, please refer to our Form ADV Part 2A available at www.adviserinfo.sec.gov.
