Understanding Your Health Savings Account (HSA)
A look at common questions on the benefits of HSAs and how to use them
Health Savings Accounts (HSAs) help you save money for qualified medical expenses and reduce your taxable income.
HSA funds collect tax-free interest, roll over year to year, and are yours to keep regardless of your job or health insurance plan.
For 2021, the maximum amount you can contribute to your HSA as an individual is $3,600, while families can contribute up to $7,200.
You are eligible to open an HSA only if your plan qualifies as a High Deductible Health Plan (HDHP)A High Deductible Health Plan (HDHP) is a type of health insurance plan that features higher-than-normal deductibles. These high deductible amounts are usually intended to lower your monthly premium payments.. If your plan does not qualify, consider asking your insurance company to increase your deductible.
Health Savings Accounts (HSA) are bank accounts used to help consumers control their healthcare expenses and save money tax-free. HSAs pay for qualified medical expenses and offer you tax savings by reducing your taxable income. Health Savings Accounts are only compatible with the High Deductible Health Plan (HDHP).
Pros of an HSA Plan
Aside from helping you save for future medical expenses, HSAs provide other benefits.
- Your HSA funds collect tax-free interest.
- HSA funds roll over year to year.
- HSA funds are yours to keep regardless of your health plan or where you work.
- You can deduct HSA contributions from income taxes.
It’s important to understand high deductible health plans (HDHP) and how they relate to an HSA. An HDHP is an insurance policy that has a higher deductibleA deductible is the amount you pay out of pocket before your insurance company covers its portion of your medical bills. For example: If your deductible is $1,000, your insurance company will not cover any costs until you pay the first $1,000 yourself. than traditional plans. You’re required to pay a higher dollar amount for out-of-pocket medical expenses before your insurance plan starts to pay.
While an HDHP might not sound like a great option at surface level, they generally offer lower monthly premiumsA premium is a fee you pay to your insurance company for a health plan coverage. This is usually a monthly cost.. A High deductible health plan commonly pairs with an HSA to allow you to pay for certain medical expenses using tax-free money you set aside.
HDHP Deductible and Out-of-Pocket Costs
Each year, high deductible health plans set an annual deductible minimum and an out-of-pocket maximum. The chart below shows the minimum and maximum costs for 2021:
|Individual HDHP||Family HDHP|
|Minimum Deductible: $1,400||Minimum Deductible: $2,800|
|Maximum Out-of-Pocket Costs: $7,000||Maximum Out-of-Pocket Costs: $14,000|
You have to meet specific criteria to be eligible for a Health Savings Account. You can open an HSA if you are under 65 years old and you purchase a qualifying HDHP. Your employer may have an HSA option, or you can open your own through a bank, credit union, or other federally-approved institution.
HSAs exclude individuals enrolled in Medicare or claimed as a dependent.
An HSA plan provides options for making contributions to your savings. Employer-based plans allow for pre-tax dollars to be deducted from your check and deposited directly to your HSA. You and your employer can contribute money, and your HSA is portable if you leave the company. For individuals or self-employed, you can take deductions when filing taxes each year.
Most HSAs give you a debit card so you can pay for healthcare costs. You can also make payments over the phone using your debit card.
There are annual limits on how much money you can deposit into your account. The contributions are tax-deferred, and money in the account rolls over year after year and earns tax-free interest. Deposit or balance minimums may apply with your bank, credit union or insurance company.
Here are the maximum amounts for 2021:
- Individual: $3,600
- Families: $7,200
Please note that if you are age 55 and older, you can contribute an additional $1,000, also called a “catch-up” contribution.
Your HSA can be used to pay for Qualified Medical Expenses. Money withdrawn from an HSA to pay for qualified medical expenses is tax-free. However, penalties apply if you take money out of your account for non-qualifying expenses. The amount taken out is subject to income tax as well as a 20% tax penalty. After you turn 65, however, the money in your HSA account can be withdrawn for any reason without penalty.
The IRS determines what medical services do and don’t qualify as expenses. The table below provides examples:
|Ambulance rides||Babysitting or childcare for a healthy baby|
|Breast pumps/lactation supplies||Controlled substances|
|Blood sugar test kits for diabetics||Cosmetic surgery|
|Chiropractor||Future medical care|
|Eyeglasses, contact lenses and eye exams||Funeral expenses|
|Hearing aids||Gym memberships|
|Lab fees||Hair transplant|
|Prescription drugs||Non-prescription drugs|
|Therapies||Nicotine gum and patches|
|Wheelchair, crutches, walkers, etc.||Teeth whitening|
Please note: This list doesn’t include every qualified medical service. The Internal Revenue Service determines which services qualify. 
You may be wondering if you can use your HSA funds to pay for your health insurance premiums. The answer? It’s not as straightforward as you may like.
Your HSA money can pay insurance premiums, but only specific types, such as long-term care coverage, health coverage while you are unemployed and COBRA plans. If you are 65 and older, HSA funds can also pay for health insurance, except Medicare Supplement policies.
If you use HSA money to pay for general major medical premiums, the transaction is a nonmedical withdrawal and faces taxes and penalties. Before you decide to use your HSA funds to pay your premiums, make sure your plan qualifies.
Flexible Savings Account (FSA)
An FSA is a common savings benefit provided by an employer and deposits a pre-tax portion of your paycheck to your FSA. You can use FSA money to pay for most health-related expenses.
What’s the main difference between an FSA and HSA? Your savings don’t roll over with an FSA, and you lose the money that you don’t use at the end of the year. With an HSA, your unused balance rolls over. Also, employers can’t make contributions to an FSA, but they can to an HSA.
Health Reimbursement Arrangements (HRA)
A Health Reimbursement Arrangement isn’t a savings account. Instead, an HRA is just a certain amount of money set aside by your employer to reimburse workers for some healthcare costs. Your employer decides the reimbursed costs, and you don’t have any control over the funds.
With a Health Savings Account, you control all your savings and decide how you spend it.
When opening an HSA account through a bank, credit union or other federally-approved institution, it’s essential to look at all of your options and find what’s right for you.
- How do I intend to use this account?
- Will it be for short-term medical costs, or do I want to invest in the future?
- Are there additional fees (maintenance fees, investment fees, etc.)?
- Are there minimum balances or investment thresholds?
- Is the account easily accessible?
Is a high deductible health plan and HSA right for me?
A high-deductible health plan can be the right option for those who need preventative care and don’t expect to visit the doctor frequently. HDHP plans can also make sense if you have a chronic condition because there often aren’t additional copays and coinsurance payments after you meet the deductible.
What if my health insurance plan isn’t HSA-eligible?
If your health plan doesn’t meet the IRS deductible requirements, you can ask your insurance company to change the deductible. When switching to a higher deductible, your monthly premium should decrease and leave you with more money to contribute to your HSA.
Can I use a HSA for my spouse if they aren’t on my plan?
Yes, you can use your HSA to pay the qualified medical expenses for your spouse. You can also use it for dependents claimed on your tax return and any person you could have claimed as a dependent on your tax return, though there are some exceptions.