On May 16, 2023, the IRS released Revenue Procedure 2023-23, announcing the inflation-adjusted contribution limits for Health Savings Accounts for calendar year 2024.^[1] The increases are the largest in the history of the HSA program, reflecting the elevated inflation that has characterized the economy over the past two years. For individuals with self-only coverage under a high-deductible health plan, the annual contribution limit increases to $4,150 (up from $3,850 in 2023). For family coverage, the limit rises to $8,300 (up from $7,750). Individuals age 55 and older may contribute an additional $1,000 catch-up contribution, bringing the maximum family contribution for an eligible older individual to $9,300.

The Triple Tax Advantage

HSAs offer a benefit structure that is unique in the tax code—a triple tax advantage that no other savings vehicle can match. Contributions to an HSA are deductible from gross income (or, if made through payroll deduction, are excluded from income and from employment taxes). The funds in the account grow tax-free. And distributions used to pay qualified medical expenses are tax-free.^[2]

This triple benefit makes the HSA superior to traditional retirement accounts in many respects. A traditional IRA or 401(k) provides a deduction on contribution but taxes distributions. A Roth IRA provides tax-free growth and distributions but no deduction on contribution. Only the HSA provides all three benefits simultaneously—deductible going in, tax-free while growing, and tax-free coming out (when used for medical expenses).

Eligibility Requirements

To contribute to an HSA, an individual must be covered under a high-deductible health plan (HDHP) and must not be covered by any other health plan that is not an HDHP. For 2024, an HDHP is defined as a plan with a minimum annual deductible of $1,600 for self-only coverage or $3,200 for family coverage, and a maximum annual out-of-pocket expense limit of $8,050 for self-only or $16,100 for family coverage.^[3]

Several common situations can disqualify an individual from HSA eligibility. Enrollment in Medicare (including Part A) makes an individual ineligible. Coverage under a spouse's non-HDHP plan, including a general-purpose flexible spending account, can also disqualify eligibility. Individuals who are claimed as a dependent on another person's tax return are ineligible. These rules require careful attention, particularly during life transitions such as turning 65, changing jobs, or getting married.

The HSA as a Long-Term Savings Vehicle

While many people use their HSAs to pay current medical expenses, the most financially advantageous strategy is often to treat the HSA as a long-term investment account. There is no requirement that HSA funds be used in the year they are contributed—unused balances carry forward indefinitely, and there is no "use it or lose it" rule (unlike flexible spending accounts). An individual who can afford to pay current medical expenses out of pocket and allow HSA funds to grow has the opportunity to build a substantial tax-free reserve.

Most HSA custodians offer investment options beyond simple savings accounts, including mutual funds, index funds, and in some cases individual securities. For an individual who contributes the maximum family amount each year and invests the funds, the HSA balance can grow significantly over time. A family contributing $8,300 per year (the 2024 limit) for twenty years, earning a seven percent average annual return, would accumulate approximately $340,000—all available for tax-free distribution for qualified medical expenses.

After age 65, the HSA becomes even more flexible. Distributions for non-medical expenses after age 65 are taxed as ordinary income (similar to a traditional IRA distribution) but are not subject to the 20 percent penalty that applies to non-medical distributions before age 65. This means that at age 65, the HSA effectively becomes an additional retirement account that can be used for any purpose, with the added benefit that medical distributions remain tax-free.

HSAs for Business Owners

For business owners, HSAs present additional planning opportunities. Self-employed individuals can deduct HSA contributions on their personal tax returns, reducing both income tax and (indirectly) self-employment tax liability. Employers who offer HDHP coverage can make contributions to employees' HSAs as a tax-free fringe benefit, deductible by the employer and excludable from the employee's income. These employer contributions are also exempt from FICA and FUTA taxes, providing payroll tax savings for both the employer and the employee.^[4]

Small business owners should consider whether an HDHP paired with employer HSA contributions might be more cost-effective than a traditional health plan with lower deductibles. The premium savings from the HDHP can be redirected into HSA contributions, and the tax benefits often more than offset the higher deductible. For healthy employees who rarely use medical services, this arrangement can be significantly more valuable than a traditional plan.

Looking Ahead

The substantial increase in HSA contribution limits for 2024 presents a timely opportunity for individuals and businesses to review their health insurance and savings strategies. For those not currently enrolled in an HDHP, the upcoming open enrollment period is the time to evaluate whether a switch makes financial sense. For those already contributing to an HSA, the higher limits allow for increased tax-advantaged savings. And for business owners evaluating employee benefit packages, the combination of an HDHP with employer HSA contributions deserves serious consideration as both a cost-management and talent-retention tool.^[5]