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Banking Basics

What Is a Health Savings Account and Should You Open One?

A health savings account, or HSA, is a savvy way to save for medical costs and reduce your taxable income. Read on to see if you qualify for an HSA and how opening one can benefit you.

Katana Dumont • January 6, 2022

The 2022 Open Enrollment Period (OEP) is steadily underway, which means now is the time to start thinking about any changes you might want to make to your health coverage plan. While going through your open enrollment checklist, one thing that should be top of mind is whether or not you want to start contributing to a health savings account (HSA). 

An HSA can help you better control medical costs while saving money on taxes, but to be eligible, you must have a special type of health insurance called a high-deductible plan. Read on to learn more about how HSAs work and if they’re the right account for you.

In This Article

  1. What Is a Health Savings Account?
  2. How Does an HSA Work?
  3. Advantages and Disadvantages of an HSA
  4. Should I Get a Health Savings Account?
  5. FAQs
  6. Final Thoughts

What Is a Health Savings Account?

A health savings account is a tax-free savings account designed specifically for qualified medical expenses. HSAs can help you pay for certain medical, dental, and vision costs, as well as those of your spouse, children, or other eligible dependents.

By using untaxed dollars in a health savings account to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. 

How Does an HSA Work?

To have an HSA, you must be enrolled in a high-deductible health plan (HDHP). For 2022, the health plan must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. Some employers that offer high-deductible health plans also offer HSAs. If yours doesn’t, you can open your own HSA account as long as you have a qualifying plan. 

An HSA is owned by an employee but can be funded by the employee or the employer. If you have an HSA through your workplace, you can set up automatic contributions directly from your paycheck. Each year, you decide how much to contribute to your HSA account, though you cannot exceed government-mandated maximums. For 2022, you can contribute up to $3,650 if you have self-only coverage or up to $7,300 for family coverage

After opening an HSA, you will receive a debit card linked to your HSA balance, which you can use to pay for eligible medical expenses. This includes deductibles, copays, and coinsurance, plus other qualified medical expenses not covered by your plan. Be aware that HSA funds generally may not be used to pay premiums.

Unlike a flexible spending account, any unused funds from your HSA will roll over year to year, meaning there is no “use it or lose it” penalty. After age 65, you can no longer contribute to an HSA, but funds can still be withdrawn for medical expenses. However, they may be subject to income tax if not used for IRS-qualified medical expenses.

HSA Eligibility

In order to access the benefits of an HSA, you must meet the IRS’s eligibility requirements. 

For an HSA, you must: 

  • Have a high-deductible health plan 
  • Not be enrolled in other health care plans (unless permitted by the IRS) 
  • Not be enrolled in Medicare
  • Not be listed as a dependent on someone else’s tax return
  • Be under the age 65 (in order to still contribute)

What Is an HDHP?

A high-deductible health plan is a type of health insurance that comes with a sizable deductible for medical expenses but charges lower monthly premiums.

Deductible = The amount you pay for covered health care services before your insurance plan starts to pay.

Premiums = The amount you pay for an insurance policy.

Advantages and Disadvantages of an HSA

Like most health care options, health savings accounts have advantages and disadvantages. As you weigh your choices, consider the following pros and cons before opening an HSA. 

ProsCons
Any unused funds automatically roll over to the next year with no use-it-or-lose-it mandate.You have to abide by maximum contribution limits.
An HSA may earn interest or other earnings, which are not taxable.There are strict eligibility requirements to qualify for an HSA.
You can keep your HSA if you change employers.You must be financially able to cover a substantial portion of your HDHP’s deductibles.
The money in an HSA can be used for yourself and also for any tax dependent.Illness can be unpredictable, making it hard to accurately budget for health care expenses.
Employer contributions don’t need to count toward your gross taxable income. If you take money out of your HSA for nonmedical expenses, you’ll have to pay taxes on it.
You can claim a tax deduction for contributions to the HSA.Some may find it difficult to set aside money to put into their HSAs.

Should I Get a Health Savings Account?

When considering an HSA, think about your health care needs and what you can reasonably afford when it comes to contributions, deductibles, and premiums. If you’re generally healthy and don’t foresee needing expensive medical care in the next year, an HSA may be an advisable choice. But if you think it’ll be hard to meet a high deductible, and/or set aside money toward HSA contributions, then it might not be worth opening one. Eligibility will, of course, also be a determining factor. If you aren’t on a high-deductible plan, an HSA won’t be an option for you right now, but may be in the future.

FAQs

Are HSAs a triple tax-advantaged account?

HSAs are often referred to as triple tax-advantaged because: 1) contributions are not subject to tax, 2) the money can be invested and grow tax-free, and 3) withdrawals are not taxed as long as they are used for qualified medical expenses.

Can an HSA be used for premiums?

HSA funds generally may not be used to pay premiums. There are some exceptions to this, like if you are receiving health care continuation coverage (such as coverage under COBRA) or are receiving federal or state unemployment benefits. 

Refer to IRS Publication 502 for more information.

What can I use my HSA for?

Your HSA contributions, which have an annual cap, can be used to pay for medical, dental, and vision care as well as prescription drugs. Amounts withdrawn from an HSA aren’t taxed as long as they are used to pay for services the IRS treats as qualified medical expenses. 

Some examples of qualified medical expenses include:

  • Deductibles
  • Dental services
  • Psychiatric treatments
  • Vision care
  • Prescription drugs 
  • Co-pays 

For a full list of qualified medical expenses, consult with the IRS or your employer. 

What is an HSA card?

An HSA card is a debit card that allows you to access funds in your health savings account. You must use your card on eligible expenses. Non-eligible purchases are subject to a 20% penalty, and you’ll have to claim them on your income taxes.

Final Thoughts

For many people, HSAs offer a tax-friendly way to pay for medical expenses. Starting an HSA at an early age, if you qualify, and allowing it to accumulate over time, can contribute greatly to your financial and medical health. All in all, HSAs can be a great tool for covering your health care costs, now and into the future.

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