What is an HSA?

A health savings account (HSA) is a consumer-owned funding vehicle that allows Americans to contribute pre-tax income for saving, investing or spending on eligible out-of-pocket medical expenses not covered by insurance.

How does an HSA work?

Consumers must be enrolled in a high-deductible health plan (HDHP) sponsored by their employer in order to enroll in an HSA. They can then contribute pre-tax income to their HSA up to a maximum contribution limit set each year by the government. Because HDHPs typically have a lower monthly premium, consumers can take some of or all those savings and put them into their HSA. Employers can also contribute to consumer accounts, a practice known as employer seeding.

Consumers can do three things with their HSA funds:

  • Pay for eligible out-of-pocket healthcare expenses not covered by their insurance plan
  • Save the money to pay for future healthcare expenses
  • Invest the money for growth (once their funds reach an amount set by their HSA custodian)

What are the benefits of an HSA?

Healthcare costs in the U.S. continue to rise, with consumers shouldering more of the costs of their care. An HSA can help make these expenses more manageable and affordable through its triple tax advantage:

  • Tax-deductible contributions, which reduce the federal income taxes a consumer owes
  • Tax-free growth of funds
  • Tax-free withdrawal of funds, as long as the funds are used on qualified out-of-pocket medical expenses

HSAs can help American consumers save up to 30% on out-of-pocket medical costs with pre-tax funds, for a total of $85 billion annually. Any funds not spent remain in the account as savings or, potentially, investments. Unlike with other tax-advantaged accounts, consumers do not forfeit their money at the end of the calendar year, meaning any savings are theirs for life.

HSAs also play a major role in managing healthcare costs later in life. As of 2020, the average couple needs an estimated $295,000 to cover medical expenses in retirement. Similar to a 401(k), an HSA allows consumers to build up long-term savings, pre-tax, for use in retirement. The major difference, however, is that consumers cannot remove 401(k) funds before retirement without penalty. An HSA account holder can access their funds at any time, as long as they’re using them on qualified out-of-pocket medical expenses. This makes an HSA a great savings vehicle for unexpected or emergency medical events.

What can I use my HSA for?

Consumers can use their HSA funds on out-of-pocket medical expenses not covered by their insurance. This can include doctor’s office visits, treatments, diagnostic tests, lab fees, medical devices, vision, dental and prescriptions. Those with HDHPs can use their pre-tax HSA funds to pay their deductible.

What are HSA rules?

HSAs are flexible accounts that allow consumers to engage in several spending and savings strategies. There are a few HSA rules, however:

  • An HSA must be paired with an HSA-eligible HDHP
  • HSA funds must be used on eligible out-of-pocket medical expenses not covered by insurance
  • Consumers can contribute up to a maximum amount set by the government each year. For example, the HSA contribution limits for 2021 are $3,600 for individual coverage and $7,200 for family coverage.