What Is a Health Savings Account?

Health Savings Accounts (HSAs) are savings accounts that let you put aside money to pay for qualified medical expenses. Introduced in 2003,¹ these triple-tax-advantaged savings accounts have been growing more common: In 2022, survey data shows there were over 35 million HSAs.² While strict rules determine who can open an HSA, how much you can contribute, and what you can use the funds for, HSAs can also be used as long-term savings accounts.³    

I’ll take you through the details of what HSAs are, how they work, and what you can do with them.

An HSA is a savings account that lets you pay for qualified medical expenses using pre-tax dollars. Paying for medical expenses with untaxed dollars can help you save money in the long run, but you can only be eligible for an HSA if you meet specific stipulations like having a high-deductible health plan.⁴ They’re considered triple-tax-advantaged because you pay no taxes on:

1. Income you contribute.⁴
2. Investment earnings.⁴
3. Funds you withdraw for qualified medical expenses.³

HSAs are set up with a “trustee,” usually a bank or insurance company, and can be coordinated with your employer or health plan provider.³ But you can set up an HSA on your own, too, as long as you have a high-deductible health plan.^3,4 You, your employer, and any other person – like a family member – can contribute to the account.³ Contributions are invested by the trustee and any investment income earned is added to your account balance.^4,5 You can then withdraw funds to pay for qualified medical expenses, tax-free.³    

TThe maximum amount you can contribute each year is limited by the IRS and adjusted periodically. In tax year 2023, you can contribute up to $3,850, or $7,750 for families. If you are 55 years of age or older, you can also make catch-up contributions of $1,000.³    

Most HSAs will provide you with a debit card to pay for qualified medical expenses. But sometimes you may need to pay out-of-pocket and submit a claim for reimbursement.³ Either way, it’s important to keep receipts and expense documentation. 

There are a few specific requirements to be eligible for an HSA:³

• You must have a high-deductible health plan (HDHP), which is a health insurance plan that has a lower-than-average monthly premium but a higher deductible – meaning you pay more money out-of-pocket before your health insurance kicks in.
• You have no other health coverage, though there are a few very specific exceptions.
• You aren’t enrolled in Medicare.
• You can’t be claimed as a dependent on someone else’s tax return.

In addition, HSA eligibility uses the IRS’ “last-month rule.” This means that you are eligible for the entire year if you meet the requirements as of the first day of the last month of your tax year, which is December 1 for most taxpayers.³

As defined by the IRS, common qualified medical expenses include:^3,6

• Dental treatment.
• Doctor’s office visits and copays.
• Surgery, except cosmetic surgery.
• Eye exams and eyeglasses.
• Flu shots.
• Physical therapy.
• Drug prescriptions.  

The recently passed CARES Act expanded the list of qualifying expenses even further, to include things like telemedicine and over-the-counter drugs, among others. When in doubt, contact your HSA provider to ensure you don’t trigger penalties for unauthorized purchases.

HSAs have a few key benefits that make them unique savings vehicles:

• Pre-taxed contributions. Contributions are usually pre-tax direct deposits from your paycheck.⁴ This increases the amount of money that gets deposited and lowers your adjusted gross income, thereby reducing the amount of income taxes you’ll pay each year.⁷
• Tax-free withdrawal. You can withdraw funds tax-free to pay for qualified medical costs at any time.³ Withdrawals for other reasons will be penalized if you’re under 65, though withdrawals not used for qualified medical costs can be treated as regular income.⁸
• Employer match. Some employers will match your contribution. If your employer does, those contributions are also tax-free.³
• Unused funds accumulate. Because HSAs are not a “use-it-or-lose-it” type of account, people can build up their balances from year to year.⁵ In 2022, there were $104 billion in assets in HSAs, 6% more than the year before.⁹
• Balances are portable. If you switch jobs, change health plan providers, or leave the workforce, you can transfer your balance into another HSA. But you must have an eligible HDHP to keep making contributions.⁵
• Funds can be invested. HSAs typically let you invest your funds so you can earn tax-free returns.⁵  

Since many HSA benefits are related to taxes, you may want to check with your personal tax advisor to best understand if they’re right for you.                   

Although there may be  advantages of HSAs, some noted disadvantages include:

• Needing an HDHP. By its nature, an HDHP means you will pay more medical expenses out-of-pocket until that high deductible is met. This may create a cash flow crunch even after considering an HDHP’s lower monthly premiums.⁸ Withdrawing funds from your HSA can ease that cash crunch, but only up to the amount that is in the account – you can’t “go negative” or borrow against future contributions.
• Contribution limits. Those who anticipate large medical bills can see the annual contribution limits as a disadvantage, as do those who view their HSA as a long-term savings account.
• HSA fees. Trustees who manage HSAs generally charge a fee for their services, which may reduce your earnings. But these fees tend to be small and are often waived if the account maintains a minimum balance, and it’s common for employers to foot the bill.⁵
• Paperwork requirements. Some HSA holders see paperwork requirements as a burden. You’ll be required to submit receipts for qualifying expenses to your HSA administrator, and there may be additional forms you may need to attach to your tax return depending on your activity for the year.¹⁰