If you’ve come across the term HSA during an annual healthcare enrollment period, you may have been confused about how you might best use this type of account, or if it’s worth opting into at all. However, more and more people are utilizing their Health Savings Account (HSA) as a long-term financial tool as well as a healthcare plan.
HSAs are tax-advantaged savings accounts that allow individuals to earmark money specifically for medical expenses. Whether covering deductibles, paying for medical services, or purchasing prescription medications, an HSA provides the means to directly manage health expenses so that account owners can take control of their healthcare decisions. An added benefit? HSAs can be used to save up for medical expenses both while you’re earning an income and during retirement.
Let’s talk more about how to utilize HSAs and why they may be a good choice for you.
Why Set Up an HSA?
A HSA is a worthwhile choice for two primary reasons. The first is to have a more hands-on approach to healthcare choices. The second is to take advantage of the tax implications.
HSAs function as bank accounts for healthcare funds, giving you direct access to how and where your medical expenses are paid. It can act as a kind of healthcare safety net for professionals as they move between jobs, or to cover unexpected or unusual medical conditions. Multiple studies have shown that having more authority over personal medical accounts can reduce an individual’s life-long medical costs, as people with restrictive or no insurance tend to forgo preventive care that may compound into costlier issues over time.
Funds that are contributed to an HSA are not taxed. That means your employer can’t withhold income taxes on HSA funds, and those funds aren’t included in your yearly taxes. Any funds that are used for unqualified purchases, however, are open to penalties and taxes.
Keep in mind these disadvantages to HSAs, too. In order to qualify for an HSA, your insurance options are limited to High Deductible Health Plans (HDHP), which means that you will be responsible for more out-of-pocket costs than a typical health insurance plan. In 2024, the minimum deductible for a HDHP at $1,600 for an individual, $3,200 for a family.
Depending on the institution with which you set up your HSA, there may be monthly or transaction-based fees to consider as well.
What Purchases Qualify Under an HSA?
A Health Savings Account (HSA) can be used for various types of medical expenses, such as:
- Deductibles – HSAs can be used to pay for the deductible of a high-deductible health plan. This can help individuals meet their out-of-pocket expenses before their insurance coverage kicks in.
- Medical Services – HSA funds can be used to pay for doctor visits, hospital stays, surgeries, and other medical procedures. This can help individuals budget and plan for their healthcare needs.
- Prescription Medications – Individuals can use their HSA to pay for prescription medications, including both brand-name and generic drugs. This can include prescriptions for the HSA account owner or anyone tax dependent on them, such as spouses and children.
- Over-the-Counter Items – Some over-the-counter items, such as bandages, first aid kits, and other seasonal purchases (such as allergy relief and flu shots) can be purchased using HSA funds.
- Long-Term Care Expenses – In some instances, HSA funds can be used to pay for long-term care services. This can be a valuable resource for individuals planning their future healthcare needs.
Before making any of the above plans or purchases, consult the eligibility requirements associated with your particular HSA. It’s good to be aware of what is not covered by your HSA, including unprescribed purchases such as nutritional supplements, fitness equipment, or weight loss treatments.
How to Set Up an HSA
Once you’ve determined that you are eligible and then enroll in a HSA-eligible insurance plan, the next step is to set up a HSA. This is a similar process to setting up any bank account, which will require valid forms of ID and a signed HSA document from your insurance provider. From there, any funds that are directed to your HSA can be managed through this account.
An important practice to have while owning a HSA is to keep a careful record of your medical expenses or purchases made with HSA funds. The IRS may require receipts in order for those purchases to fall under HSA tax guidelines, so it’s recommended to keep them on hand for the life of your account. Talk to your insurance provider or account institution about tools to help keep your receipts organized!
Do HSAs Expire?
Unlike a Flexible Spending Account (FSA), another popular healthcare plan option, HSAs do not expire and will “roll over” for as long as you add funds to it, year after year, until you close the account. HSAs are not tied to your employer, so you can change jobs, skip a year of contributing your HSA, or retire without affecting it.
There are low or no minimums required to set up your HSA, and though there are limitations set by the IRS for how much you can contribute to your HSA annually, there is no cap on how much you can accrue in your HSA over time. When you bank with an FDIC-regulated institution, your HSA will be FDIC-insured up to the federal limits.
Final Considerations
In the last decade, the popularity of HSAs as a tool for managing healthcare costs has dramatically increased. There are approximately 36 million HSAs in use in the US, with a combined value above $116 billion. The Consumer Financial Protection Bureau estimates this increase to be more than 500% in value since 2013.
But does that mean that an HSA is the right choice for you? Not necessarily. Consider your personal and/or family circumstances and evaluate your healthcare options with a critical eye. Don’t be shy about consulting your Human Resources representative or any other pertinent advisors. And if you choose to utilize an HSA, shop for the best fit before opening an account with your chosen financial institution.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as financial, legal, or tax advice. A professional advisor should be consulted for specific issues.
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