What Is a Health Savings Account?

A health savings account works with a high-deductible health plan, designed to save you money for your healthcare expenses. Here's what you should know.

Health savings accounts (HSA) were created so you could save money to pay for out-of-pocket healthcare expenses. HSAs work with high-deductible insurance plans.

When you sign up for a high-deductible plan, you can tell your company how much money to withhold from each paycheck and put in your HSA. Your employer may contribute money as well. If you’re self-employed, you can set up an HSA through your bank and make deposits on your own.

 

YOU MIGHT ALSO LIKE: Making Sense of the Health Insurance Marketplace

 

HSA advantages

You’ll get a triple tax break. All of the money you and your employer contribute is exempt from federal income tax, reducing your overall tax bill, and employer contributions don’t count as income. Your money will gain tax-deferred interest. Finally, you don’t pay taxes on any amount you use to pay for qualified medical expenses.

An HSA lets you plan for medical expenses. You can use the money to pay for deductibles, copays, coinsurance, and prescription drugs (but not your monthly insurance premium). Moreover, the limit on the amount you contribute, in general, mirrors the caps on individual and family deductibles of many high-deductible health insurance plans.

It also helps you plan for the future. Your account will never expire, and, with the tax savings, an HSA can work like an Individual Retirement Account (IRA), in which you put away tax-deferred money to use after you retire.

For 2024, you can contribute up to $4,150 to an HSA for yourself, and $8,300 for your family. If you’re 55 or older, you can save an extra $1,000.

Unlike with flexible spending accounts, in which at the end of the year you lose any unspent money you set aside for healthcare expenses, you can roll over your HSA balance each year.

You can change the amount you put into an HSA at any time during the year, as long as you don’t go over the federal annual limit. You’ll probably use a debit card to pay for health expenses, but you can also request checks for healthcare providers who won’t take a card.

HSA caveats

You can’t contribute to an HSA if you’re covered under another plan, such as Medicare, a preferred provider organization, or a health maintenance organization. You also can’t be a dependent on someone else’s health plan.

The Internal Revenue Service (IRS) prohibits people 65 and older who are not on Medicare from contributing to an HSA. The IRS has rules for how anyone 65 or older can use their HSA.

You have to be careful how you spend your HSA money. While prescription drugs are qualified expenses, over-the-counter medicines, like aspirin, are not. The IRS decides which expenses are qualified and unqualified.

If you spend money from your HSA on something that’s not a healthcare expense, the IRS will catch you. When you file your tax return, the IRS will fine you 20 percent of the cost of the non-qualified expense and add your withdrawal to your gross income — to tax it again. You may even set yourself up for an audit.

 

YOU MIGHT ALSO LIKE: Our Health Insurance section