A look at health savings accounts

Texas' open enrollment period for health insurance plans closes Jan. 15, and residents across the state are considering their options for benefits as they head into the new year.

One option eligible residents may want to consider is a health savings account. HSAs are tax-incentivized accounts that can be used to purchase approved, health-related items and cover other medical expenses.

Here's everything you should know about HSAs in Texas:

Who is eligible for an HSA plan?

Only individuals who are not enrolled in Medicare and have a high-deductible health plan qualify to open an HSA.

High-deductible health plans are those that have "an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage," according to the Internal Revenue Service. Additionally, annual out-of-pocket expenses may not exceed "$8,050 for self-only coverage or $16,100 for family coverage."

Individuals who are covered by a spouse's plan, dependents, military members and others enrolled in Tricare -- and those with flexible spending accounts -- are also ineligible for HSAs.

What are the benefits of an HSA account?

Account holders qualify for a range of tax benefits, including tax-free withdrawals for qualifying medical expenses, according to a spokesperson for the Employees Retirement System of Texas, an organization which manages benefits for Texas state employees.

Contributions made to HSAs are also allocated before tax, which reduces an account holder's overall taxable income. Earnings made through interest or investments are also not taxed.

What are the downsides of an HSA account?

While HSAs are intended to help those with high-deductible health plans meet the cost of coverage, the costly out-of-pocket expenses that come with high-deductible plans may not be the best choice for those who may need extensive preventive or ongoing treatment, according to United Healthcare.

Individuals younger than 65 who use their HSAs for non-qualifying medical expenses will also incur a 20% penalty. While those who are 65 and older are not subject to the penalty, standard taxes will still be applied to any expenses that do not qualify.

Should you max out your HSA contributions?

According to the ERS, the maximum an individual can contribute to their HSA in 2024 is $4,150. For families, the maximum is $8,300. People who are 55 and older are also eligible to make an additional "catch-up" contribution of $1,000 each year.

Whether account holder's should max out their contributions is a decision depends on their specific circumstances, according to the ERS spokesperson. It's important to weigh the tax and health benefits of making the maximum contribution against other, non-health related expenses that may arise in the near future.