What is an HSA or health savings account?

Senior man speaking with female pharmacist

A health savings account, or HSA, is an interest-earning account you can use to help pay for your medical expenses. HSAs provide some tax advantages, but are only an option with certain high-deductible health insurance plans.

An HSA is held in a bank or other financial institution. You can contribute and withdraw from that account just as you would from any other savings account. However, money held in an HSA must only be used for qualified medical expenses; otherwise, it is subject to taxes and other penalties.

Generally, HSAs are used by individuals who expect very few health costs and want to keep their monthly insurance premiums low. But if you have an expensive medical event, you will have to pay a higher deductible.

There are a number of things to remember when considering a health savings account.

Are you eligible for an HSA?

Not everyone can get an HSA. There are 3 important criteria you must meet to use a health savings account:

  1. You must be enrolled in a high-deductible health plan – To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). These plans have specific limits for the annual deductible you must pay, as well as maximum limits for out-of-pocket expenses. These limits are defined by the IRS and change yearly.
  2. Under age 65 – In order to qualify for an HSA, you must be under the age of 65 and not enrolled in Medicare.
  3. No other health plans – Your HDHP must be your only health plan; you can’t be covered by any other health insurance.

How an HSA works

Using an HSA is very similar to any savings account.

  • Open an account – Once you have purchased a health plan that is HSA eligible, you can set up an HSA through your bank or other IRS-approved organization. You then decide how much you want to contribute and how often. There are limits on the amount you can contribute each year, but the balance does roll over if the funds aren’t spent in that year.
  • Earn interest, tax-free – The funds you contribute to your account will earn tax-free interest. There are no use-it-or-lose-it limits, meaning any money you contributed that is left at the end of the year rolls over into the next year. This money continues to earn interest and remains tax-free.
  • Use funds for qualified health-related expenses – The money you contribute to your HSA can be used for medical expenses like deductibles and copays. It is possible to withdraw funds from an HSA for nonmedical purposes; however, you will have to pay taxes on the money, plus a penalty. The penalty is waived if you are age 65 or older.

Advantages and disadvantages of an HSA

There are pros and cons to choosing an HSA. These are important to keep in mind when deciding on the right type of plan and plan options for you.

Health savings account

Pros Cons

HSAs allow you to set aside money that can go toward your deductible and copays.

HSAs can only be added to high-deductible health plans.

HSA contributions are deducted before taxes via payroll deduction, or can be counted as tax deductions if you are self-employed or unemployed.

You will be taxed on any money you withdraw from an HSA for nonmedical expenses and could be subject to other federal government penalties.

Since HSAs earn interest, they provide a way to grow your account for future healthcare needs.

You cannot use HSA funds for anything but deductibles, copays, and covered medical expenses (those that would be paid by your insurance plan).

The money you contribute belongs to you and any unused funds carry over from year to year.

If you struggle financially it may be difficult to set aside funds for an HSA, so you would have less money saved to put toward the higher deductible.

Any money in your account, including any contributions from your employer, belongs to you and goes with you if you change jobs.


Is an HSA right for you?

If you have a high-deductible health plan, you might want to consider adding a health savings account. It offers a way to save money and earn interest to help offset some of your medical costs.

Decided that a HSA isn’t right for you? Take a look at this comparison chart to see if an HMO or PPO is a better fit.

You can learn more about managing healthcare costs in this article.