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We've updated one of our most popular materials. See what's new in our guide to MERPs.

A Guide to Health Savings Accounts

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 UsedHealth_savings_account_use_cases

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.

2. 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.

3. 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.

4. 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.

5. 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.

Learn the differences between HSAs, HRAs, and FSAs