Laura answer’s a listener’s question about who can max out the family limit for an HSA, whether you’re married, have a domestic partner, or have children.
Laura answer’s a listener’s question about who can max out the family limit for an HSA, whether you’re married, have a domestic partner, or have children.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Smeet, who says:
"We thank you and your team for making extremely helpful and informative podcasts. We are learning a lot and appreciate it!
I have an HSA question. My wife and I are both covered under my employer's HSA-eligible health plan and we're both also covered under her employer's health plan, which is not HSA-eligible.
I opened an HSA last year and was under the impression I could contribute the maximum for a family plan. But within a week, I found out that I am not eligible to have an HSA since I am covered under my wife's health plan. We tried to have me removed from my wife's insurance, but her employer refused.
But I had already contributed about $250, and $55 came from my employer. They have taken their portion back, but I don't know what to do with my contribution. Since it was pre-tax, how do I correct the taxes?
For 2025, I am planning to get coverage only through my employer's HSA-eligible plan. My wife will remain on her employer's plan and be on my plan as secondary insurance so we can max out the family contribution limit. Will that be OK?"
Thanks for your question, Smeet. I know that managing an HSA as a couple can get
confusing. This post will explain the benefits of an HSA and the rules for who can max out the family limit, whether you're married, have a domestic partner, or have children.
Welcome back, everyone, and thanks for joining me on episode 869! I'm Laura Adams, an award-winning author, female finance spokesperson, money speaker, founder of The Money Stack, a Substack newsletter, and host of the Money Girl podcast with over 43 million downloads.
If you're getting value from the free content we love creating, subscribe and consider submitting a 5-star rating or review on your podcast app of choice! If you have a question about money for the show, leave it on our voicemail at 302-364-0308. You can also send an email and sign up for the free Money Stack newsletter at LauraDAdams.com.
What is an HSA?
HSAs were created in 2003 to help Americans manage and reduce the rising costs of healthcare. They're one of the most powerful tax-advantaged accounts because they allow you to cut medical costs, eliminate taxes, and invest your balance for growth.
Many financial experts call it a "triple tax threat" because HSAs provide three significant tax advantages:
1. Your HSA contributions are tax deductible.
2. Your HSA earnings grow tax-deferred.
3. Your HSA withdrawals are never taxed.
When you take money from an HSA to pay qualified healthcare expenses–including medical, dental, hearing, and vision care costs–your contributions and account earnings are entirely tax-free. What's not to love about that?
RELATED: HSA hacks–how to optimize your health savings account
Who qualifies for an HSA?
According to the IRS, to qualify for an HSA contribution, you must meet the following four requirements:
HSA rules for married couples
When you're married, the IRS considers you a single unit for HSA purposes. So, if one or both of you qualify for a HSA, the most you can contribute is the allowable family limit. Having a family health plan means it covers you and someone else, like a spouse or dependent child.
For 2024, if you have a family health plan, the HSA contribution limit is $8,300. That limit will increase to $8,550 in 2025.
If you're married and both have self-only HSA-eligible coverage, each spouse can contribute up to the annual individual limit, which is $4,150 for 2024. That limit will increase to $4,300 in 2025. If you're over 55, you can contribute an additional $1,000 to your HSA with an individual or family plan.
When both spouses are covered by the same HSA-eligible health plan, you can have an HSA in one spouse's name or opt for separate HSAs, as long as you don't exceed the annual family contribution limit. But you can never have a joint HSA.
Because Smeet says he will no longer be covered by his wife's health plan next year and will continue enrollment in his employer's HSA-eligible plan, he will qualify for an HSA. Being on both plans was a violation of the second requirement that I mentioned, making him ineligible for an HSA this year.
Since Smeet's wife will also be covered on his HSA-eligible plan next year, he will qualify to contribute up to the annual family limit, which will be $8,550 for 2025. She will also be covered on her own primary plan, which is allowed. Remember that Smeet is the qualifying HSA holder, not his wife. So he can't have another health plan, but she can.
RELATED: 4 common HSA mistakes and how to correct them
HSA rules for domestic partners
The HSA rules differ for unmarried, domestic partners because they're two separate entities for HSA purposes.
That means if you both have HSA-eligible health plans (or the same plan), aren't a tax dependent of the other partner, and have someone else (like a child) on your health plan, you can both contribute up to the family maximum. However, when each person in a domestic partnership only insures themselves, you can only contribute up to the individual HSA limit.
However, you cannot pay your partner's eligible medical expenses with your HSA since you're unmarried. You could only pay costs for yourself and any dependents.
If one partner is a tax dependent of the other, only the partner with the HSA-eligible health plan could have an HSA and fund it up to the annual family contribution limit. The
HSA account holder could use it to pay for the dependent's eligible expenses.
Remember that being a dependent makes you ineligible for your own HSA, according to the fourth requirement I reviewed.
READ ALSO: HSA hacks–how to optimize your health savings account
HSA rules for withdrawals
I mentioned that you can't have a joint HSA. Each spouse or partner who wants to
contribute to one must qualify on their own and open a separate account. You can't transfer funds between HSAs; however, you can withdraw funds to pay or reimburse eligible healthcare expenses for yourself, a spouse, and dependents.
Some employers offer HSA matching, which gets included in the annual individual and family limits. Note that whether you get HSA-qualified insurance on your own or through an employer, you can take it with you if you leave a job, change your health plans, or retire.
A great HSA feature is that there's no spending deadline. If you don't have any medical expenses or don't want to use HSA funds to pay for them, your balance rolls over from year to year, even if you no longer have an HSA-eligible plan. You can always spend it on qualified, out-of-pocket healthcare costs for you, dependents, and a spouse, no matter if you file taxes jointly or separately.
Note that withdrawing HSA funds for non-qualified expenses, like groceries or a vacation, means paying income taxes plus a steep 20% penalty. So, it's never wise to put money in an HSA you might need for living expenses.
If you still have HSA funds after age 65, it becomes similar to a retirement account. You can use it for non-medical expenses without penalty; however, you must pay income tax on non-qualified withdrawals. That's a great reason to max out an HSA yearly, even if you don't expect many medical expenses.
READ ALSO: HSAs in 2024–understanding changes and maximizing benefits
HSA rules for overcontributions
Now, let's get back to Smeet's question about handling the HSA contributions he made of about $250 before he quickly realized that he wasn't eligible for an HSA and shouldn't have made them. It's your responsibility to catch and correct excess HSA contributions. And it's best to contact your account administrator for help cleaning up the overpayment.
If you over-contribute to an HSA and don't correct it or you choose to apply the excess to a future year, you must pay a 6% penalty on the excess every year it remains in your account. But if you catch the mistake before you file taxes (including extensions), you can avoid the 6% penalty by withdrawing the excess, plus any investment earnings.
In Smeet's case, where there was a mistaken contribution, reversing it is straightforward. There may be a form on his HSA portal that he can submit, or he can contact his HSA administrator.
Reversing a contribution you didn't mean to make adds it to your taxable income through the forms your HSA administrator must file annually. They file Form 1099-SA showing all your distributions and Form 5498-SA showing all your contributions for the year.
Because the distribution is due to a mistaken contribution, Smeet won't be subject to an additional 20% penalty for the correction. But it's essential to correct the error as soon as possible, ideally before the end of the year, or before your tax filing due date at the latest.
LISTEN ALSO: What happens if you over-contribute to retirement account
How do you open an HSA?
If you qualify for an HSA, they're available at many online and local banks, credit unions, brokerages, and specialty institutions. A couple of my favorites are Lively and HSA Bank.
You can learn more about HSAs in IRS Publication 969, Health Savings Accounts, and Other Tax-Favored Health Plans.
READ ALSO: Your guide to savings money with an HSA now and in retirement
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That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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