By Laura Saunders

Health savings accounts are already a sweet deal for many Americans. They could soon get sweeter.

The sprawling tax-and-spending bill passed by the House of Representatives on May 22 includes changes to HSAs, as they're called. If enacted by the Senate, which takes up the legislation in June, they would expand access to these tax-favored accounts.

So far, the changes have attracted little opposition or even comment. But they pack a powerful punch.

HSAs are tied to health insurance and offer remarkable tax breaks to users who can afford to maximize them. Currently, at least 60 million Americans are covered by HSAs. The changes in the bill could expand access to 20 million more, according to Roy Ramthun, a specialist with HSA Consulting Services.

"This would be the biggest expansion of HSAs since they took effect in 2004, and a positive jolt for the country and the industry," says Ramthun.

In particular, the changes address glitches that have prevented many older taxpayers from having HSAs. They also simplify confusing HSA rules and allow previously prohibited uses, such as using funds from the account to pay for gym memberships.

Here's the background. Over the past two decades, HSAs have become a part of a widely available health-coverage option, both for employees and individual buyers. To qualify for an HSA, someone must have high-deductible health coverage that meets certain standards.

Current law allows a range of deductibles. Ramthun says that for 2025 a typical deductible for coverage in the individual market is about $5,000 for singles and $10,000 for a family -- and about half that for employer-based plans. The healthcare coverage also has out-of-pocket maximums.

To encourage people to use high-deductible plans, the health insurance is paired with an HSA. Either the plan user or the employer, or both, can get a tax break for putting dollars into the HSA. Then the account dollars can be invested and grow tax-free until withdrawal. Withdrawals are tax-free, too, if they're used for a broad range of medical expenses that haven't been reimbursed by other means. That's a triple tax win.

For 2025, the maximum tax-deductible HSA contribution is $8,550 for a family and $4,300 for single coverage, plus an additional $1,000 for participants age 55 and older. Total assets in HSAs were $147 billion at the end of 2024, compared with $30 billion in 2015, according to industry data gathered by Devenir.

HSA owners who minimize withdrawals from their accounts -- either because they have low health costs or can afford to pay current expenses out of pocket -- get tax breaks even better than the ones for IRAs and 401(k)s.

Tax-free withdrawals, for example, can be made long after expenses are incurred, as long as the HSA owner has adequate proof of them. So HSA owners can reimburse themselves for physician copayments or uncovered physical-therapy fees many years after paying the actual bills. This makes HSAs a great rainy-day fund.

HSAs can also serve as supplemental tax-favored retirement accounts. Starting at age 65, the owner can take withdrawals for nonmedical expenses and pay income tax on them, similar to payouts from traditional IRAs.

One more thing: Children under age 26 who are no longer dependents but are still covered by their parents' insurance can fund their own HSAs, if the parents' coverage includes an HSA. They don't have to use their own earnings; the funding can be from a gift.

The pending legislation has 10 provisions expanding HSA benefits that would take effect for 2026 and beyond. Here are some of the most important.

HSAs for Medicare Part A recipients

Current law prohibits HSA contributions by recipients of Medicare Part A, which mainly covers the cost of hospitalization. Many Americans are automatically enrolled in Part A when they turn 65.

This provision shut many older workers out of employer-provided health plans with HSAs, even if they preferred them to Medicare Part B and D options. The change would allow them to keep their workplace coverage if desired and contribute to an HSA.

Integration with Affordable Care Act coverage

Current law makes it hard or impossible for HSAs to be part of some so-called Obamacare plans used by individual buyers. The proposal would designate Bronze and Catastrophic plans, which have the highest deductibles, as qualified coverage eligible for HSAs and their benefits.

This change would mostly help two groups. One is older Americans who have retired but not yet reached the Medicare eligibility age of 65 and look to ACA plans for coverage. The other is workers under 30 who think they'll be healthy and opt only for catastrophic coverage under the ACA.

HSA withdrawals for fitness expenses

The proposal would permit tax-free HSA withdrawals for expenses for fitness programs or facilities that aren't allowed under current law.

The annual withdrawal limit for these fitness expenses is $500 for singles and $1,000 for families, and other restrictions apply. For example, the HSA withdrawals won't be tax free if the facility offers golf, sailing, horseback riding or hunting.

Catch-up contributions by spouses to the same account

As is true for IRAs, there are no joint HSAs for married couples. Yet each spouse is eligible to make a $1,000 "catch-up contribution" annually at age 55 and beyond. Under current law, each spouse has to make this contribution to his or her own HSA -- but what if one spouse has an HSA and the other doesn't?

The new provision would clarify that both spouses can make their catch-up contributions to the same HSA.

Write to Laura Saunders at Laura.Saunders@wsj.com

(END) Dow Jones Newswires

May 29, 2025 05:30 ET (09:30 GMT)

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