What is a Health Savings Account?

A Health Savings Account, or HSA, is a financial account established by an individual or family to pay for qualified medical expenses tax-free. Health Savings Accounts can be opened by an individual, or offered by an employer alongside a high-deductible health insurance plan.

Health Savings Accounts combine the benefits of both traditional and Roth 401(k)s and IRAs for medical expenses. Taxpayers receive a 100% income tax deduction on annual contributions, they may withdraw HSA funds tax-free to reimburse themselves for qualified medical expenses, and they may defer taking such reimbursements indefinitely without penalties.

HSAs are unique - “IRAs on Steroids” - with triple tax advantages:

  • Tax-deductible contributions,

  • Tax-free accumulation of interest and dividends tax-free, and

  • Tax-free distributions for qualified medical expenses.

As such, Health Savings Accounts are growing in popularity. From 2006 to 2013 over 10 million adults acquired either an HRA or HSA plan. In 2013 over 11.8 million adults had an HRA or HSA, with total assets in these "accounts" over $23.8 billion.

The sections outlined on our navigation bar provide more information about Health Savings Accounts.

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Health Savings Account Resources

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In this eBook, we go over exactly how the QSEHRA applies to employees no matter their current insurance situation.

Health Reimbursement Report 2017

Download this report to see charts showing data for industry, family status, region to see if a QSEHRA will work for you.

The Comprehensive Guide to the Small Business HRA

Everything you need to know about the new QSEHRA. Including cost comparisons, case studies, and other tools.

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Pros and Cons of a HSA

When evaluating Health Savings Accounts, consider these pros and cons.Health_savings_account_pros_cons

Health Savings Account - Pros

1. Tax Savings

Contributions you make to the HSA, up to the annual limit, are tax deductible. Likewise, any contributions made by your employer are excluded from your gross income ("pre-tax").

2. Full Rollover

All contributions remain in your HSA indefinitely until you use them. There is no penalty if you don’t use the money, and it rolls over year to year.

3. No Tax on Qualified Withdrawals

Withdrawals used to pay qualified medical expenses for you, your spouse, and your dependents are never taxed. And, interest you earn on the account accumulates over the years tax-deferred, and if used to pay for qualified medical expenses is tax-free.

4. Portability

The account is portable and yours to keep. It stays with you if you change employers or leave the workforce.

Health Savings Account - Cons

1. Contribution Limits

With Health Savings Accounts there are annual contribution maximums which limit how much you can contribute each year.

2. Eligibility Requirements

To contribute to a Health Savings Accounts, you are required to be enrolled in an HSA-Qualified High-Deductible Health Plan.

3. Complicated Rules

With HSAs, the individual is the plan administrator. As such, many individuals find the rules and recordkeeping of HSAs to be complicated and cumbersome.

Health Savings Account Use Cases

This section provides an overview of how Health Savings Accounts are used, key features, and tips for maximizing an HSA.

How Health Savings Accounts are Used

Health Savings Accounts (HSAs) are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. To be eligible for an HSA, you must also have an HSA-qualified high-deductible health plan.

An employer usually offers an HSA-qualified high deductible health plan and an HSA. However, any individual with qualifying coverage can open an HSA on their own.

Because HSAs are individually owned, an employee owns the account and can take it with them regardless of employment.

Key Features of Health Savings Accounts

To better understand HSAs, here is a summary of key features:

  • Anyone may contribute to an HSA (ex: employer, employee, or third party).
  • HSA distributions are tax-free.
  • There are certain eligibility requirements to open an HSA ( Read more about HSA Rules and Requirements ).
  • The maximum annual HSA contribution for 2015 is $3,350 (single) and $6,650 (family).
  • HSA funds may be used on any unreimbursed medical care expenses as defined by the IRS (see Publication 502), and insurance premiums for unemployed individuals.
  • HSA funds accumulate over time (they rollover year to year; they do not expire at the end of the year).
  • The individual (not the employer) owns the HSA, and has continued access to the HSA regardless of employment.
  • Withdrawals for non-medical purposes are subject to income tax and a 20% penalty tax.
  • Once the account holder reaches age 65 (Medicare eligibility age), becomes disabled, or dies, withdrawals for nonmedical purposes are subject to income tax only, with no penalty.

How to Maximize Your Health Savings Account

  1. Understand the Benefits of Health Savings Accounts

To maximize your Health Savings Account (HSA), it is first important to understand the benefits of an HSA. To summarize:

  1. Contributions you make to the HSA, up to the annual limit, are tax deductible. Likewise, any contributions made by your employer are excluded from your gross income ("pre-tax").
  2. All contributions remain in your HSA indefinitely until you use them. There is no penalty if you don’t use the money, and it rolls over year to year.
  3. Interest you earn on the account accumulates over the years tax-deferred, and if used to pay for qualified medical expenses is tax-free.
  4. Withdrawals used to pay qualified medical expenses for you, your spouse, and your dependents are never taxed.
  5. The account is portable and yours to keep. It stays with you if you change employers or leave the workforce.
  1. Contribute the Maximum Amount Allowed

If you're using the HSA as a retirement savings vehicle and/or you anticipate having a lot of out-of-pocket medical expenses in the future, aim to contribute the maximum amount allowed each year.

Read more:   HSA Rules and Requirements .

  1. Know What Expenses are Eligible

You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, co-payments for medical care, prescription drugs, or bills not covered by insurance such as vision and dental care. The IRS determines the types of medical expenses you can use tax-free with HSA funds. They are listed in IRS Publication 502.

If you use HSA funds for non-medical expenses, you are required to pay taxes on the withdrawal, plus a 20% penalty before age 65.

  1. Be an Informed Healthcare Consumer

With a high-deductible health plan and an HSA, you (the health care consumer) have more control over the purse strings. As such, research and comparison shop. Most insurance companies now have tools such as online calculators to let you estimate the cost of big-ticket items such as an MRI or surgery. And, consider lower cost alternatives such as calling the 24-hour nurse line instead of going to the doctor's office for a minor ailment, and switch to lower-cost generic medication.

  1. Keep Your Receipts

Lastly, you must keep receipts for everything you purchase using your HSA. If your HSA is ever audited you will need a record of your expenses. The easiest way to do this? Take a picture or scan your receipts and keep them electronically.

HSA Rules and Requirements

This section outlines Health Saving Account rules and requirements.

HSA Eligibility

To be eligible for an HSA:

  • You must be covered under a high-deductible health plan (HDHP)
  • You must have no other health coverage except what is permitted by the IRS (see IRS Publication 969)
  • You must not be enrolled in Medicare
  • You must not be claimed as a dependent on someone else's most recent tax return.

2015 HSA Contribution Limits

For calendar year 2015, the annual HSA contribution limits are:

  • Individuals (self-only coverage) - $3,350
  • Family coverage - $6,650
  • HSA “Catch Up Amount” if 55+ Years Old - $1,000

With an HSA, anyone can contribute (employer, individual, family member, etc). Once deposited, all HSA contributions belong to the individual, regardless of who made the contribution. As such, any distribution and/or removal of funds from the HSA has to be authorized by the individual (not the employer). Many other requests related to the account (such as a request for a new debit card or request for an address change) can only be made by the individual.

HDHP Minimum Required Deductibles

For calendar year 2015, the High Deductible Health Plan (HDHP) required deductibles for an HSA are:

  • $1,300 for self-only coverage
  • $2,600 for family coverage

Out-of-Pocket Maximum

The annual out-of-pocket expenses include deductibles, co-payments, and other amounts, but not premiums. For calendar year 2015, the out-of-pocket maximums are:

  • $6,450 for self-only coverage
  • $12,900 for family coverage

Additional HSA Rules

In addition to the guidelines above, here are additional HSA rules:

  • Anyone may contribute to an HSA (ex: employer, employee, or third party)
  • HSA distributions are tax-free
  • HSA funds may be used on any unreimbursed medical care expenses as defined by the IRS (see Publication 502), and insurance premiums for unemployed individuals
  • HSA funds accumulate over time (they rollover year to year; they do not expire at the end of the year)
  • The individual (not the employer) owns the HSA, and has continued access to the HSA regardless of employment
  • Withdrawals for non-medical purposes are subject to income tax and a 20% penalty tax
  • Once the account holder reaches age 65 (Medicare eligibility age), becomes disabled, or dies, withdrawals for nonmedical purposes are subject to income tax only, with no penalty

These rules are outlined in IRS Publication 969.

HSA Frequently Asked Questions

This section answers frequently asked questions (FAQs) about Health Savings Accounts.

How Do I Qualify for an HSA?

To open an HSA, you need a high-deductible health plan (HDHP). This can be an HDHP that you purchase on your own, or through your employer. The IRS defines what is considered an HDHP. In 2015, your plan deductible must be at least $1,300 for individual coverage or $2,600 for family coverage.

To summarize, to be eligible for an HSA:

  • You must be covered under a high-deductible health plan (HDHP)
  • You have no other health coverage except what is permitted by the IRS (see IRS Publication 969)
  • You are not enrolled in Medicare

How Much Can I Contribute to My HSA?

You can make pre-tax contributions (or tax-deductible contributions, if not through an employer) in 2015 of up to $3,350/year if you have individual coverage, or up to $6,650/year if you have family coverage. People age 55 and older can save an extra $1,000 per year. You can add money to the account until the tax-filing deadline (April 15, 2015, for 2014 contributions).

How Can I use My HSA Money?

You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance such as vision and dental care. The IRS determines the types of medical expenses you can use tax-free with HSA funds. They are listed in IRS Publication 502.

Unlike with a Flexible Spending Account (FSA), you don’t have to use HSA funds by the end of the year. Rather, HSA funds can grow tax-deferred in your HSA account for later use.

If you use HSA funds for non-medical expenses, you are required to pay taxes on the withdrawal, plus a 20% penalty before age 65.

How Do I Invest my HSA Money?

HSA administrators typically offer accounts that are easy to access for medical expenses. And, many HSA administrators or banks will let you shift money into mutual funds and other investments after your HSA account balance reaches a certain level.

Can I Contribute to My HSA Account After Age 65?

You can keep your HSA account at any age, but you can no longer make new contributions to the account after you have signed up for Medicare Part A or Medicare Part B, which usually happens at age 65.

Do the HSA Tax Benefits Phase Out at Certain Income Levels

No. With an HSA, there are no income limits.

If I Set Up an HSA Through My Employer, What Happens if I Switch Jobs?

You can keep the money in your HSA account after you leave a job, similar to a 401(k). There is no requirement to spend it before you terminate employment.

How Does Health Reform Change HSAs?

The Affordable Care Act ("health reform") was signed into law in 2010 and made two changes to HSAs:

  • In 2011, over-the-counter medications were no longer eligible for tax-free withdrawal unless obtained with a prescription (except for insulin).
  • In 2011, the excise tax for non-qualified HSA withdrawals increased from 10% to 20%.

What is the Difference between an HRA, HSA, and FSA?

Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs) are all types of   Medical Reimbursement Plans . However, each type has different benefits and requirements for employers and employees.

For a detailed overview of the benefits and requirements of HRAs, HSAs, and FSAs see:

Medical Reimbursement Plans Comparison Chart

Additional questions on Health Savings Accounts?   Contact us.   We’d be happy to help.

Additional Reading on Health Savings Accounts

Health Savings Account - HSA 2015 Rules Requirements

This article outlines the Health Savings Account (HSA) for 2015 including contribution limits, minimum deductibles, and out-of-pocket maximum rules.   >> Read more.

HRA, HSA, and FSA - Changes under Health Reform

The Affordable Care Act (known as ACA, ObamaCare, or health reform) was signed into law in 2010 and impacts many areas of health care and health insurance, including medical reimbursement programs such as HRAs, HSAs, and FSAs.   >> Read more.

Health Savings Accounts (HSAs) - 10 FAQs

Health Savings Accounts (HSAs) are financial accounts established by an individual or family to pay for qualified medical expenses. This article outlines ten frequently asked questions (FAQs).   >> Read more.

HSAs vs. HRPs (Savings Accounts vs. Reimbursement Plans)

Which is better: A Healthcare Reimbursement Plan (HRP) or a Health Savings Account (HSA)? The answer depends on what you are trying to accomplish and whether you are an employer or an employee. For most employers HRPs are superior to HSAs.   >> Read more.

HSAs vs. FSAs - What is the Difference?

Two popular forms of ABHPs are health savings accounts (HSAs) and health flexible spending accounts (FSAs). This article compares these two types of ABHPs.   >> Read more.

The Ultimate Cheat Sheet on Account-Based Health Plans

Account-based health plans are increasing in popularity, especially in light of the changes due to the Affordable Care Act (ACA). The following article provides a brief overview of the four main types of medical spending accounts used with ABHPs.   >> Read more.

Affordable Care Act's Impact on Health Savings Accounts (HSAs)

The Affordable Care Act (ACA) has impacted many areas of healthcare and health insurance. As such, the rules for account-based health plans, including health savings accounts (HSAs) have changed. This article discusses how healthcare reform and the ACA have impacted HSAs.   >> Read more.

The Comprehensive Guide to the Small Business HRA