What is a health savings account?
A special kind of tax-exempt savings account, an HSA makes it easier to meet the financial demands of rising healthcare costs.
For better or worse, high deductible health plans (HDHP) are becoming increasingly common, especially among Americans with employer-based health coverage. Though a HDHP means you’ll pay a lower premium each month, the amount you have to pay before your insurance kicks in is a lot higher than with a traditional health plan.
Many Americans are already worried about how they’re going to afford care. That’s where health savings accounts, better known as HSAs, come in. A special kind of tax-exempt savings account, HSAs make it easier for people to meet the financial demands of higher deductibles (and rising healthcare costs) without wiping out their bank accounts.
Below, you'll find an in-depth look at HSAs: what they are, how they work, who qualifies, their use cases, and the advantages and drawbacks to having an account.
- What does HSA stand for?
- How does an HSA work?
- How do I qualify for an HSA in 2018?
- If I’m married, can my spouse and I have a joint HSA?
- What can I pay for using an HSA?
- Can I withdraw money from my HSA for non-medical expenses?
- What are the benefits of having an HSA in 2018?
- Are there any disadvantages to having an HSA?
- How can I get an HSA?
HSA stands for health savings account. An HSA isn’t just any savings account, though. It’s a type of savings account that allows you to put money aside, pre-tax, that you can later use to pay for qualified medical expenses.
Sounds simple, right? But you’re not alone if you’re still unclear about what an HSA is and how it works — the topic is pretty complex. There are many requirements surrounding HSAs: who can have one, what the money from an HSA can be used for, and how an HSA can be used as an investing tool, among other nuances. Let’s break it down even further.
An HSA allows you to make contributions with pre-tax dollars to a savings account that you can use, now or later, to cover healthcare costs. If you have a high deductible health plan through your employer, you should be able to set up an HSA through them and choose how much pre-tax income you’ll contribute each time you get paid.
Each year, the government determines a maximum HSA contribution limit. This means that throughout the year, you can’t contribute more to your HSA than this set amount. For 2018, the limits are:
|Year||Individual contribution limit||Family contribution limit|
Many employers also contribute a set amount to their employees’ HSAs or may match your contributions, up to a certain dollar amount. You’ll want to talk to your benefits team or HR manager to get all the details specific to your employer. It’s important to know that the contribution limit is aggregate, meaning that you plus your employer (or anyone else contributing funds) cannot exceed the federal limit in a given year.
Once you have funds in your HSA, you’ll be able to use them for any qualified medical expenses (more on that below). This is helpful for many people because it allows them to save money just for healthcare expenses—and your money can go up to 30% further due to tax savings.1
Ideally, the amount saved in your HSA will be equal to or greater than the amount of your deductible. In that case, by the time you’ve met your out-of-pocket maximum, your insurance would kick in and cover the rest.
In order to qualify for an HSA, you must have a HDHP. Each year, the federal government determines a minimum threshold that must be met by your deductible to be considered a HDHP. There’s a different threshold for individual plans and family plans. Below are the thresholds for this year:
|Year||Individual minimum deductible||Family minimum deductible|
In addition to having an HDHP, the Internal Revenue Service (IRS) states that in order to qualify for an HSA, you must:
- Not be covered by other health insurance
- Not be enrolled in Medicare
- Not be eligible to be claimed as a dependent on someone else’s tax return
There is often confusion about whether you need to go through your employer to get an HSA. If you’re self-employed or unemployed, you can still open an HSA, so long as you meet the above requirements.
This is a great question. In general, married couples can’t have a joint HSA even if they are covered under the same HDHP. Each spouse can open an individual HSA if they’re eligible (based on the qualifications above). Alternatively, one spouse can use their HSA to cover the qualified medical expenses of their partner, even if their partner is not covered under their HDHP.
The IRS determines what you can and cannot use an HSA to pay for. In general, the restrictions are pretty lax, allowing you to use your HSA to pay for anything that’s a “qualified medical expense,” including:
- Health plan co-pays
- Prescription drugs
- Dental work
- Eyeglasses and contact lenses
- Surgery, therapy, and counseling
- Vaccinations and other preventive care
This list is by no means comprehensive—the line between what is and isn’t a “qualified medical expense” is often blurry. You can see a complete list of HSA eligible expenses here.
HSA funds can also be used for your children’s or spouse’s qualified medical expenses, even if they aren’t covered under your HSA-eligible health plan.
You can withdraw money from your HSA for any reason. A better question to ask is, should you? When you use the money in your HSA for anything other than a qualified medical expense, you’ll face tax penalties. This means that if you use your HSA for non-medical expenses, you’ll have to pay taxes on the amount you used. If you’re under age 65, you’ll have to pay a 20% penalty on top of that.
HSAs are designed to help lower the overall cost you’ll pay for healthcare in a given year. There are a lot of advantages to having an HSA, including:
HSAs roll over year after year — Say you contribute the 2018 maximum of $3,450 for an individual HDHP but you only spend $1,450. The remaining $2,000 will roll over and be available to you next year.
An HSA balance can be invested — After contributing the maximum amount to your HSA for several years, you may find yourself with thousands of dollars that you haven’t yet used. You can invest your unused HSA funds and grow your balance, giving you more money to use toward healthcare expenses in the future.
HSA’s are transferable — Moving jobs? Changing health plans? Retiring? You can take your HSA with you. If you still have a HDHP, you can simply continue to use your HSA as normal. If you no longer have a HDHP, you can still spend the money in your account (but you can’t make additional contributions).
Your employer can contribute to your HSA — If you have a health plan through your employer, they can contribute to your HSA on your behalf. The amount they pitch in can range (some employers will match your contributions up to a certain dollar amount), so be sure to talk to your benefits team or HR manager.
Anyone can contribute to your HSA — HSA contributions aren’t limited to you and your employer. Anyone can make a contribution, so don’t be shy about letting your family know you’d rather have additional money to put toward healthcare costs than (another) pair of socks.
HSAs have triple tax benefits — Not only can you contribute pre-tax dollars to your HSA, any contributions made with after-tax dollars can be deducted from your total income on your tax return. This means you’ll end up owing less to the IRS come tax time. You also won’t pay taxes on any withdrawals you make for qualified medical expenses and any interest you earn is tax-free. Win, win, win.
If you have a HDHP, there’s no reason not to have an HSA. HSAs can can act as a cushion for out-of-pocket expenses, protecting you and your family from unexpected healthcare costs.
However, there are some small downsides to consider:
You’ll need to keep all your receipts to prove that withdrawals were used for qualified medical expenses in case you get audited by the IRS.
Most HSAs charge a monthly fee or per-transaction fee.
It can be tempting to put off seeking medical care if you don’t want to use the money in your HSA.
If you withdraw funds for non-qualified medical expenses before you’re 65, you’ll have to pay taxes on those withdrawals, in addition to paying a 20% penalty. If you do the same after age 65, you’ll owe taxes but not the penalty.
Among individuals enrolled in a CDHP, 25% are enrolled in an HSA-eligible health plan but haven't opened an HSA, according to the Employee Benefit Research Institute. That adds up to more than 7 million people who could be saving on healthcare costs, but aren’t.
Our mission at Amino is to connect everyone to affordable, quality care—and help them save money while they’re at it—so we’re making HSAs as easy to use as possible, with helpful features like real-time transaction tracking and simple receipt upload.
If you get health insurance through your employer and you have a HDHP, make sure to ask your benefits team or HR manager if they offer an HSA—or just ask them to check out Amino with this pre-written email.
Neither Amino, Inc., nor its affiliates are engaged in rendering federal or state tax or legal advice and this document is not intended as tax or legal advice. Please consult your tax or legal adviser. ↩