What Is a Health Savings Account (HSA)?

How Does a Health Savings Account (HSA) Work?

A health savings account is a special savings account that is meant to be used for health care expenses. These accounts can be offered with high-deductible health plans and are funded with pretax dollars. That means the money can come out of your paycheck before taxes are taken out of your pay, and you can stash it away until you need it for a medical expense.

The money you save in your health savings account can be used for qualified medical expenses. The Internal Revenue Service (IRS) determines which expenses qualify. Many over-the-counter medicines are covered, too.

Examples of qualified medical expenses include:

• Ambulance services
• Artificial limbs
• Birth control
• Breast pumps
• Contact lenses and eye exams
• Drug treatment
• Fertility enhancement
• Guide dogs
• Lab fees
• Long-term care
• Medications
• Nursing home care and nursing services
• Physical exams
• Pregnancy tests
• Surgery
• Therapy
• Vision correction
• Weight-loss programs

Health savings accounts are funded through contributions from the insured person. The amount you can contribute depends on whether you have individual or family coverage. Contribution amounts can change from tax year to tax year. The IRS sets the annual contribution limits for HSAs, and they're adjusted regularly for inflation.

For example, in 2022, HSA contribution limits were $3,650 for individuals and $7,300 for someone with health coverage for the whole family. For 2023, contribution limits are $3,850 for individual plans and $7,750 for family plans.

Tax Benefits of an HSA

HSAs are tax-advantaged accounts. That means they offer certain tax benefits to those who choose a high-deductible health plan. These tax benefits include:

• Tax-deductible contributions
• Tax-deferred growth
• Tax-free withdrawals when used for qualified medical expenses

Money in an HSA rolls over from year to year, too. So if you make contributions this year, for example, but have no medical expenses in which you need to use HSA money, the funds in your account will be there next year. The money will even stay in your HSA account if you change employers. You can invest your HSA contributions, too, so they can earn interest and grow even more.

Example of a Health Savings Account

Let’s say you get a job with a new employer that offers a high-deductible health plan. The plan includes a health savings account. You contribute $1,000 to your HSA each year, and you withdraw that money as needed to pay for contact lenses and prescription drugs.

You use your debit card connected to your HSA to pay for these items. One day, you forget to use your debit card for your prescription at the pharmacy. That night, you log into your account and request the money be sent to you as a reimbursement. You have to attach a receipt showing the amount you paid. Once it’s submitted, the money is sent for direct deposit into your personal checking account.

HSA vs. FSA: A Quick Comparison

An HSA is a health savings account. An FSA is a flexible spending account. HSAs are offered with high-deductible health plans. FSAs may be offered separately from your health insurance plan. HSA money rolls over year to year, while the money that can roll over in an FSA is limited. Both allow you to contribute money pretax from your paycheck, and the money can be used for qualified medical expenses. Both accounts have annual contribution limits. Depending on your situation, an HSA or an FSA may be better for you and your family.

How To Get a Health Savings Account

Health savings accounts can be offered by banks, credit unions, brokerages, and other financial institutions. Again, you must be eligible to contribute to an HSA in order to get one. According to IRS rules, you qualify for an HSA if you:

• Are covered under a high-deductible health plan
• Have no other health coverage
• Are not enrolled in Medicare
• Cannot be claimed as a dependent on someone else's tax return

You can talk to your employer about whether an HSA is included with your workplace health insurance coverage. If you're self-employed and pay for your own health insurance, you can review the details of your plan to see if you have the option to set up an HSA.

Assuming that you're eligible, you can enroll in the plan and begin making contributions up to the allowed annual limit. Your HSA may allow for automatic contributions, which is a plus if you're more of a hands-offer saver.

Money in a health savings account can be withdrawn tax-free if you're using it to pay qualified medical expenses. If you take money from an HSA to pay for anything other than qualified health care expenses, you'll pay a 20% tax penalty and income tax on the distribution.

Frequently Asked Questions (FAQs)