What is an HSA?
A Health Savings Account (HSA) is a pre-tax savings account available to you if you are enrolled in a qualified High Deductible Health Plan (HDHP). If you are enrolled in a HSA you can make tax-free contributions to pay for health insurance costs for yourself and tax dependents now and in the future. This includes expenses like doctor and hospital visits, co-payments, eyeglasses, prescriptions, certain long-term insurance premiums, and COBRA premiums. HSA funds can also be used to pay for a covered participant’s deductible.
HSA funds never expire, they carry over year to year and follow you from employer to employer. That means if you ever leave your employer your HSA stays with you and can be used after you are no longer enrolled in an High Deductible Health Plan, even through your retirement.
Unpaid owners, sole proprietors, partners in a partnership, greater than 2% owners of an S-Corp and their family members are not eligible to make a pre-tax contribution to an HSA, but they can contribute after-tax dollars. Please reach out to Justworks support to set up after-tax contributions to an HSA.
All other benefits-eligible employees enrolled in a High Deductible Health Plan are only eligible for pre-tax contributions. Click here for more information on how to enroll.
Investing in your HSA and retirement planning
HSA funds can be invested in the stock market and gains can be used tax free on qualified expenses. Most HSA’s offer investment options such as mutual funds and certain stocks and bonds that can be invested in to accumulate growth. As funds are used on qualified expenses, investments are redeemed or sold and remain completely tax free.
After the age of 65, HSA funds can be distributed for costs not related to medical expenses without incurring the 20% tax penalty. They are however subject to income tax when used for non-medical expenses.
HSA’s offer triple tax savings, the money that is contributed is pre-tax, when used for qualified medical expenses they are tax free, and any associated gains or dividends from investments are also tax free. Since HSA contributions are pre-tax they also lower your taxable income for the year.
Is there a deadline for enrollment?
There is no deadline for setting up your HSA. If you are enrolled in a qualified High Deductible Health Plan, you can get started at any time.
You can also change your deferral amount at any time but keep in mind that depending on the timing it may not take effect until the next benefit month.
Are my funds available for use immediately?
With an HSA, only the funds you’ve already contributed to your account are available for use. For example, you've elected to defer $3,550 across 12 pay periods. After your first deferral, you will only have $295.83 (or $3,550 / 12) available to use. Similar to a savings account, you cannot withdraw more funds than what is available in your account.
However, the funds that you save in your HSA account can be used at any point for a qualified medical expense, as they are not tied to a plan year or employer. This means that you can access your HSA account even after you have left your employer. However, you cannot continue to contribute funds once you are no longer enrolled in a High Deductible Health Plan.
What happens to my HSA funds and outstanding claims, if I switch to a non- HDHP?
Since HSA funds are not tied to an employer or plan year you can access the funds at any time. That means if you enroll in an HSA and contribute funds that are not used during that plan year, you can access them at any point regardless of the health insurance coverage you may have going forward. That also means if you have an outstanding claim or would like to make a claim after your plan year is over, you can do so at any time. There is no time limit to process a claim for an HSA.
Can I change my HSA contribution amounts at any time?
You can change your HSA contributions at any time. Keep in mind that any changes made will not take effect until the following month.
To review the amount you are contributing or to make any changes to your HSA please login to Justworks and under My Benefits and scroll down to HSA.
What are the caps on the HSA contributions?
There’s an IRS cap on maximum contributions an employee can make per calendar year.
For 2023, the caps are as follows:
- Individual: $3,850
- Family: $7,750
For 2024, the caps are as follows:
- Individual: $4,150
- Family: $8,300
If you are over the age of 55 you can make a “catch-up contributions” of an extra $1,000 per year towards those caps. Contributions are deducted from the second paycheck of each month.
Last Month Rule
According to the last month rule, if you are eligible and enroll in a High Deductible Health Plan (HDHP) on December 1st, you are considered an eligible individual for the entire year (through December 31 of the following year). As an eligible individual you can also contribute up to the annual HSA limit for the last month of the tax year. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual through the entire testing period.
The testing period begins with the last month of the tax year and ends on the last day of the 12th month following that month (for example, December 1, 2023, through December 31, 2024). If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, the total contributions made to your HSA that would not have been possible without the last-month rule, must be included towards your annual income for that year. This amount is also subject to a 10% tax penalty.
Please note that Justworks’ health insurance plan year runs from November 1 through Oct 31. This means if you are enrolled in a HDHP on December 1, 2023 and contribute any amount up to the annual HSA limit for the last month of the year but then change to a non-HDHP effective November 1, 2024, you will no longer be considered an eligible individual for that testing period per the last-month rule. If your December contribution was greater than the pro rata amount you would have been eligible for in the prior tax year, the excess contribution amount will be penalized under this rule.
Example: The 2023 annual limit is $3,850 (~$320.83/mo). Jack enrolled in an HDHP on 12/1/23 and contributes $1000 to their HSA for the month of December utilizing the Last Month Rule. Jack then changes to a non-HDHP plan on 11/1/24, meaning that Jack no longer qualifies as eligible for the Last Month Rule. Jack will owe taxes and penalty on ~$641.76 ( Election - Eligible Prorated Amount ).
To learn more about the Last Month Rule please review IRS Publication 969.
Do my HSA funds expire? Does my unused funds roll over, if I don’t use them by December 31st?
HSA funds will never expire. HSA funds roll over year after year and do not expire on December 31st (in the way FSA funds do), even when you are no longer with your employer or enrolled in an HDHP.
When I am terminated what happens to my HSA?
Terminated employees are no longer able to contribute to their HSA, but you will always have access to your HSA and can always use any funds in your HSA.
If you are terminated the fees on your HSA account may change. To review the fees that may be associated with your account after termination contact your HSA provider or visit our Help Center Article for Health Saving Accounts (HSA) via Optum Financial.
If my spouse has an FSA, can I still have an HSA?
No, if one spouse is enrolled in an HSA or Health FSA the other spouse can not enroll in the opposite benefit. This is because both accounts extend tax benefits to family members and having the two together violates the health coverage clause of the accounts.
If me or my spouse are enrolled in an HSA can we still have a DCFSA? Can we each have a DCFSA?
Yes, if you or your spouse are enrolled in an HSA you can still have a DCFSA.
If your spouse is already enrolled in a DCFSA you can enroll in a second DCFSA however the combined total can not exceed $5,000.
Can I have an HSA without being enrolled in health insurance through Justworks?
No, HSAs are restricted to people who are enrolled in a High Deductible Health Plan (HDHP). Without enrolling in a HDHP through Justworks you can not enroll in a Justworks HSA.
What happens to my HSA if my employer...
I switch from the Justworks master policy to an open market plan through Justworks?
- You can retain your HSA without interruption when moving to an open market plan through Justworks.
If I am enrolled in an FSA and switch to an HDHP, will I be able to enroll in an HSA?
- Whether you are enrolled in a master policy or open market plan, you must wait for your FSA enrollment to expire before you can enroll in an HSA. This is because an individual cannot be enrolled in both FSA and HSA simultaneously.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.