What Is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged account that can be used to pay for qualified medical expenses.
Contributions to an HSA are made with pretax dollars, which reduces your taxable income. The money in your HSA can be used to pay for qualified medical expenses tax-free.
HSAs are available to anyone enrolled in a high-deductible health plan (HDHP). An HDHP generally has lower monthly premiums than a traditional health plan but higher deductibles.
How Does an HSA Work?
An HSA works in conjunction with a high-deductible health plan (HDHP). You must be enrolled in an HDHP to be eligible for an HSA.
Contributions to your HSA are made with pretax dollars, which reduces your taxable income.
The money in your HSA can be used to pay for qualified medical expenses tax-free.
You can use your HSA to pay for other health care costs, such as long-term care insurance, but you will pay taxes on the withdrawals.
How to Open an HSA
You can open an HSA through your employer or on your own. Employers often make contributions to employee HSAs as a benefit.
If you open an HSA on your own, you can do so through a bank, credit union, or other financial institution that offers HSAs.
To open an HSA, you will need to provide the following:
- Your name, address, and Social Security number
- Your HDHP policy information
- The date your HDHP coverage begins
Eligibility for an HSA
You are eligible for an HSA if enrolled in a high-deductible health plan (HDHP).
To be eligible, you cannot be covered by any other health plan that is not an HDHP, such as a traditional health plan, a health maintenance organization (HMO), or a point-of-service (POS) plan.
You also cannot be enrolled in Medicare or have a dependent child covered by a health plan.
What to Look for When Selecting an HSA Provider
When selecting an HSA provider, you should consider the following:
Fees Charged by the Provider
Some providers charge fees for opening and maintaining an account. Review the fee schedule before selecting a provider.
Investment Options Offered
Some HSAs offer the ability to invest account funds in a variety of investment products, such as mutual funds. If you are interested in investing your HSA funds, make sure the provider offers investment options.
Customer Service and Support Offered
If you have questions about your HSA or need assistance, you should be able to get help from the provider.
Features and Benefits Offered
Some providers offer additional features and benefits, such as online account access and mobile app functionality. Consider what features are important to you when selecting a provider.
HSA Rules and Regulations
The rules and regulations governing HSAs are set by the Internal Revenue Service (IRS). These rules include the following:
Annual Contribution Limits
For 2022, the HSA contribution limit is $3,650 for individuals with self-only HDHP coverage and $7,300 for individuals with family HDHP coverage. In 2023, the limits are $3,850 and $7,750, respectively.
Catch-up Contributions
Individuals 55 or older can make catch-up contributions of up to $1,000 per year.
Eligible Expenses
HSAs can be used to pay for a wide range of qualified medical expenses, including doctor visits, prescription drugs, and dental and vision care.
Withdrawal Rules
Withdrawals from an HSA are tax-free if used to pay for qualified medical expenses. Withdrawals for other purposes are subject to income tax and may be subject to a 10% penalty.
HSA contribution limits are set by the IRS and may change from year to year. Catch-up contributions are also set by the IRS and may change yearly.
HSA Contributions
You or your employer can contribute to your HSA monthly, quarterly, or annually. There is no limit on the frequency of contributions.
The maximum contribution for 2022 is $3,650 for individuals with self-only HDHP coverage and $7,300 for individuals with family HDHP coverage. In 2023, these limits have increased to $3,850 and $7,750, respectively.
If you are 55 or older, you can make catch-up contributions of up to $1,000 per year.
HSA Withdrawals
Withdrawals from your HSA are tax-free if used to pay for qualified medical expenses. Withdrawals for other purposes are subject to income tax and may be subject to a 10% penalty.
Qualified medical expenses include:
- Doctor visits
- Prescription drugs
- Dental and vision care
- Hospital costs
- Medical insurance premiums (if you are unemployed or between jobs)
- Long-term care insurance premiums
- Qualified medical expenses include other health-related costs, such as acupuncture and crutches.
Pros of an HSA
Below are some advantages of a health savings account:
- The money in your HSA can be used to pay for a wide range of qualified medical expenses, including doctor visits, prescription drugs, and dental and vision care.
- Withdrawals from your HSA are tax-free if used to pay for qualified medical expenses.
- You can use your HSA funds to pay health insurance premiums if you are unemployed or between jobs.
- HSA funds can be invested and grow tax-deferred.HSA funds can be used to pay for health care costs in retirement.
Cons of an HSA
Below are some disadvantages of a health savings account:
- You must be enrolled in a high-deductible health plan (HDHP) to contribute to an HSA.
- The contribution limit for 2022 is $3,650 for individuals with self-only HDHP coverage and $7,300 for individuals with family HDHP coverage. In 2023, these limits have increased to $3,850 and $7,750, respectively.
- If you use HSA funds for non-qualified medical expenses, you will have to pay income tax on the withdrawal, plus a 10% penalty.
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HSA vs Flexible Savings Account
An FSA is a tax-advantaged account that can be used to pay for qualified medical expenses. Like an HSA, you must be enrolled in a high-deductible health plan (HDHP) to contribute to an FSA.
The key difference between an FSA and an HSA is that FSAs are not portable. You will lose any unused FSA funds if you leave your job or change your health plans.
Another key difference is that FSA contributions are made with pretax dollars, while HSA contributions are made after-tax dollars. This means that you will not have to pay income tax on withdrawals from an FSA, but you will have to pay income tax on withdrawals from an HSA.
The Bottom Line
An HSA is a tax-advantaged account that can be used to pay for qualified medical expenses. To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP).
The maximum contribution for 2022 is $3,650 for individuals with self-only HDHP coverage and $7,300 for individuals with family HDHP coverage. In 2023, these limits have increased to $3,850 and $7,750, respectively.
In addition, if you are 55 or older, you can make catch-up contributions of up to $1,000 per year.
Withdrawals from your HSA are tax-free if used to pay for qualified medical expenses. Withdrawals for other purposes are subject to income tax and may be subject to a 10% penalty.
FAQs
1. What is an HSA?
An HSA is a tax-advantaged account that can be used to pay for qualified medical expenses. To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP).
2. How much can I contribute to an HSA?
The maximum contribution for 2020 is $3,550 for individuals with self-only HDHP coverage and $7,100 for individuals with family HDHP coverage. In 2023, these limits have increased to $3,850 and $7,750, respectively. If you are 55 or older, you can make catch-up contributions of up to $1,000 per year.
3. Can I use my HSA funds to pay health insurance premiums?
You can use your HSA funds to pay health insurance premiums if you are unemployed or between jobs.
4. What happens to my HSA if I leave my job or change my health plans?
Your HSA is portable, which means it stays with you if you leave your job or change your health plans.
5. Are withdrawals from my HSA taxed?
Withdrawals from your HSA are tax-free if used to pay for qualified medical expenses. Withdrawals for other purposes are subject to income tax and may be subject to a 10% penalty.
