A Health Savings Account (HSA) is a tax-advantaged savings account that individuals can use to pay for qualified medical expenses. HSAs are available to individuals covered by a high-deductible health plan (HDHP), a health insurance plan with a high deductible that individuals must pay out of pocket before their insurance coverage kicks in. HSAs are owned by the individual, and the funds in the account can be rolled over from year to year. This means that individuals can accumulate savings in their HSA over time to pay for future medical expenses.
However, it’s important to note that there are contribution limits to HSAs, and individuals who withdraw funds from their HSA for non-qualified expenses may be subject to penalties and taxes. It’s always recommended to consult with a tax professional or financial advisor before opening an HSA to ensure that it is the right option for your financial situation.
Features of Health Savings Accounts
Here are some of the features of Health Savings Accounts:
- Tax-deductible contributions – Contributions made to an HSA are tax-deductible up to the annual limit set by the IRS. This can help lower an individual’s taxable income.
- Tax-free withdrawals – Withdrawals from an HSA are tax-free if used for qualified medical expenses. This includes things like doctor visits, prescriptions, and medical procedures.
- Portable savings – Unlike other healthcare accounts, HSAs are not tied to a specific employer or insurance plan. The account can be moved from job to job, and the funds roll over year to year.
- Investment options – Many HSA providers offer investment options for account holders who want to grow their savings over time.
- No minimum contribution – Unlike other accounts like Flexible Spending Accounts (FSAs), no minimum contribution is required for an HSA.
Basic Rules for Health Savings Accounts Enrollment
Here are some of the rules of Health Savings Accounts:
- Eligibility – To be eligible for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP). The minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.
- Contribution limits – For 2023, the annual contribution limit for an individual is $9,200 and $18,400 for a family. Those over age 55 can make an additional catch-up contribution of $1,000.
- Qualified medical expenses – Withdrawals from an HSA are tax-free if used for qualified medical expenses. These include medical, dental, and vision expenses that are not covered by insurance.
- Non-qualified expenses – If funds are withdrawn for non-qualified expenses before age 65, they will be subject to a 20% penalty in addition to taxes. After age 65, withdrawals can be made for any reason without penalty, but they will be subject to income tax.
- Record-keeping – Account holders should keep receipts and documentation for all qualified medical expenses to prove that withdrawals were used for eligible expenses.
Eligibility for Health Savings Accounts
To be eligible for an HSA, an individual must:
- Be covered by a high-deductible health plan (HDHP)
- Not be covered by any other health plan that is not an HDHP, such as a spouse’s plan or Medicare
- Not be claimed as a dependent on someone else’s tax return
- Not be enrolled in a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA)
How to Apply for Health Savings Accounts
To apply for an HSA, individuals can:
- Open an account with a bank, credit union, or other financial institution that offers HSAs.
- Check with their employer to see if they offer an HSA and if they will make contributions on their behalf.
- Research and compare different HSA providers to find one that meets their needs.
- Once an account is open, contributions can be made online through direct deposit or check.
Health Savings Accounts (HSAs) can be a valuable tool for individuals who are covered by a high-deductible health plan (HDHP). By offering tax advantages and accumulating savings over time, HSAs provide individuals with a way to pay for qualified medical expenses while reducing their taxable income. However, it’s important to understand the contribution limits and eligibility requirements of HSAs before opening an account and to use the funds in the account responsibly to avoid penalties and taxes. With the rising costs of healthcare in the United States, HSAs can be a helpful way for individuals to manage their medical expenses and plan for their financial future.