2025 Tax Proposal | Health Savings Accounts Unleashed
Health Savings Accounts (HSA) offer tax-deductible contributions, tax-free growth, and tax-free medical withdrawals. This is a powerful financial planning combination.
In May 2025, Congress introduced a significant tax reform bill, that included provisions aimed at modernizing financial tools like Health Savings Accounts (HSAs). This legislation would expand HSA flexibility by introducing provisions such as pre-deductible mental health coverage, retroactive expense reimbursements, and support for direct primary care, reflecting a continued broadening of consumer-directed healthcare initiatives. This, in combination with contribution limit increases and ‘triple tax sheltering’, makes the HSA a powerful long term planning tool.
Background | Understanding Health Savings Accounts
Health Savings Accounts (HSAs) are tax-advantaged savings vehicles designed to help individuals with high-deductible health plans (HDHPs) manage medical expenses. Authorized under Section 223 of the Internal Revenue Code and introduced in 2003 via the Medicare Prescription Drug, Improvement, and Modernization Act, HSAs are one of the most tax-favored accounts in the U.S. tax code, offering a “triple tax advantage” that incentivizes saving for healthcare costs:
· Tax-Deductible Contributions: Contributions reduce federal taxable income, lowering adjusted gross income (AGI). For 2025, individuals can deduct up to $4,300 (self-only coverage) or $8,550 (family coverage), with an additional $1,000 catch-up for those 55 and older. Payroll contributions are excluded from federal income, Social Security, and Medicare taxes, saving up to 7.65% in payroll taxes.
· Tax-Free Growth: Earnings from investments (e.g., interest, dividends, capital gains) are exempt from federal income tax, allowing compounding growth if funds are invested in mutual funds or other assets offered by many HSA providers.
· Tax-Free Withdrawals: Withdrawals for qualified medical expenses (e.g., doctor visits, prescriptions, medical equipment) are federal tax-free, with no time limit on reimbursements. After age 65, non-medical withdrawals are penalty-free but subject to income tax, similar to a traditional IRA.
· State Tax Benefits: Many states mirror federal tax exemptions, though some (e.g., California, New Jersey) tax contributions or earnings, so benefits vary by state.
· Portability: Unlike Flexible Spending Accounts (FSAs), HSA funds roll over indefinitely and remain with the account holder across job or plan changes, enhancing long-term tax-free savings potential.
To be eligible for an HSA in 2025, individuals must meet the following requirements:
Be enrolled in a High-Deductible Health Plan (HDHP), definition:
A minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage.
An out-of-pocket maximum not exceeding $8,300 for self-only coverage or $16,600 for family coverage.
Not be enrolled in Medicare.
Not be claimed as a dependent on someone else’s tax return.
Not have other disqualifying health coverage (e.g., non-HDHP plans or standard Flexible Spending Accounts, with exceptions for dental, vision, or preventive care plans).
HSAs are a critical tool for addressing rising healthcare costs, with U.S. healthcare spending reaching $4.5 trillion in 2022, according to the Centers for Medicare & Medicaid Services. Unlike Flexible Savings Accounts (FSAs), HSA funds roll over indefinitely, enabling savings for future medical needs or retirement. With approximately 36 million Americans enrolled in HSA-eligible High-Deductible Plans as of 2024, HSAs empower individuals to take control of their healthcare expenses by leveraging tax advantaged savings vehicles.
Evolution | Broadening the Scope of HSA Benefits
The CARES Act of 2020 expanded qualified medical expenses for Health Savings Accounts to include an expanded list of over-the-counter medications without a prescription. Telehealth services, which saw increased demand during the COVID-19 pandemic, were also temporarily added as qualified expenses, with some provisions made permanent in later legislation.
The Health Savings Act of 2022 further modernized HSAs by clarifying the eligibility of certain primary care services, such as direct primary care (DPC) memberships, under specific conditions. Direct Primary Care (DPC) memberships are subscription-based healthcare model where patients pay a monthly fee for unlimited access to primary care services, bypassing traditional insurance billing.
For 2025, the IRS updated HSA contribution limits to account for inflation:
$4,300 for self-only coverage.
$8,550 for family coverage.
$1,000 catch-up contribution for individuals aged 55 and older.
These changes have made HSAs more adaptable to modern healthcare needs, supporting a wide range of medical expenses and aligning with trends like telehealth and DPC models.
Proposed Enhancements | May 2025 Tax Proposal
On May 13, 2025, Congress introduced a tax reform bill that proposes significant expansions to HSA benefits, aiming to enhance access to preventive and comprehensive healthcare services. These provisions reflect a broader effort to modernize HSAs and make them more flexible tools for managing healthcare costs, particularly for mental health, chronic care, and alternative care models.
The proposed legislative enhancements include:
Mental Health Pre-Deductible Coverage:
Your High Deductible Plan could cover up to $500 in mental health services (e.g., therapy, counseling) before the deductible is met, without disqualifying HSA eligibility.
This safe harbor provision facilitates earlier access to mental health care, addressing the needs of millions of Americans facing mental health challenges.
Retroactive Expense Reimbursement:
HSA funds could reimburse qualified medical expenses incurred up to 60 days before the HSA was established, provided the individual was enrolled in an HDHP at the time.
This provision supports individuals transitioning to HDHPs, reducing financial barriers during coverage changes.
Expanded Eligible Providers:
HSA funds could be used for direct primary care (DPC) fees (e.g., monthly subscriptions) and services at employer-sponsored worksite health clinics.
This change recognizes the growing popularity of DPC models and on-site clinics, which provide affordable, accessible care.
Increased Catch-Up Contributions:
The catch-up contribution limit for individuals aged 60 and older would increase to $2,000, up from $1,000.
This acknowledges rising healthcare costs in the years leading up to Medicare eligibility.
Streamlined Coordination with FSAs and HRAs:
The bill proposes loosening restrictions on concurrent use of HSAs with Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs), allowing more flexible benefit designs.
Potential Fitness and Wellness Expenses:
While not yet in the current bill, bipartisan support is growing for future expansions to include up to $1,000 per year (or $2,000 for families) for fitness-related expenses, such as gym memberships, fitness equipment, and youth sports fees, as proposed in the Personal Health Investment Today (PHIT) Act.
These enhancements aim to make HSAs more inclusive and responsive to diverse healthcare needs and provide important tax advantaged planning opportunities.
Summary
The tax legislation introduced on May 13, 2025, represents an important step toward enhancing the flexibility and value of Health Savings Accounts. By - expanding eligible expenses, increasing contribution limits for older adults, and supporting innovative care models like direct primary care and worksite clinics - these changes could empower more Americans to manage their healthcare costs effectively, either in the present or during retirement.
Please check in with us on amendments and revisions, as the 2025 tax legislation progresses to the Senate.
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ABOUT THE AUTHOR
Susan Dahl is a well regarded executive, female leader in the financial services industry, and dedicated client advisor with over twenty-five years of experience. Susan writes on topics such as investing, Integrated Wealth Service, and financial planning. She is the author of the blog series Female Advisor Perspective, a look into the process and planning insights that emerge when problem solving is viewed through the unique lens of experienced female financial advisors. Susan’s deep and diverse background extends from global investing to risk management to change leadership. This background has laid the groundwork for an approach that asks more of wealth. She shares some insights in her talk for TEDx, Can Happy Make You Money?
