Mother and son at the doctor's office.

HSA: Should You Have A Health Savings Account?

Cathie Ericson8-minute read
December 08, 2021

Making important financial decisions can be challenging, and as you contemplate your options in health insurance and savings plans, both categories may seem endless. What if there was an opportunity to address both health care and tax savings with one account? Let’s find out what this exciting option is and why you might want to consider it.

What Is A Health Savings Account (HSA)?

An HSA, or health savings account, is a tax-advantaged vehicle for setting aside pretax dollars that – when paired with a high-deductible health plan – pays for qualified medical expenses. The money in the account can be invested to increase your savings, and the earnings are not taxed.

HSAs supplement high-deductible health plans (HDHP), which are a type of health insurance plan that cost less per month than a lower deductible plan. The HSA is a companion account of sorts that allows you to save pretax dollars to pay for medical expenses not covered under HDHPs

Who Can Get An HSA?

An HSA is an important feature for people who have chosen to use a HDHP as their health insurance coverage. That’s because with an HDHP, you will need to pay out of pocket for any health care services you receive (except for certain preventative care services as mandated by the Affordable Care Act) until you reach your deductible.

An HSA is an important component of these plans because it allows you to save money tax-free for these larger payments you will have to make for medical expenses until you reach the deductible.

If you use the funds for anything other than qualified medical expenses, you may owe penalties. However, the money in these plans belongs to you, even if you switch jobs or choose another health plan in the future.

In order to be eligible, talk to your employer about the options for enrollment in a HDHP as your health insurance plan or search one out on the open market if that’s where you get your coverage.

What Is A High Deductible Health Plan (HDHP)?

A HDHP offers low monthly premiums, which can save you money throughout the year compared with other types of plans. However, you will then need to cover the costs of your medical care until you reach the deductible as specified by your plan. And it’s important to note that even once you reach that deductible, you still might be responsible for copays or coinsurance.

For 2022, the IRS has defined a HDHP as one with a minimum annual deductible in these amounts:

Deductible Amount For:

2021

2022

Single Person

$1,400

$1,400

Family

$2,800

$2,800

How Do HSAs Work?

Wondering how you can take advantage of this wise financial vehicle? Here’s what you need to know to open and use an HSA.

Open An HSA

Before opening an HSA, confirm that you are enrolled in an HDHP. Many employers offer HSAs as a benefit along with your other medical programs, but even if your employer doesn’t offer one, you can open an HSA with any HSA-certified lender, such as a bank.

Enjoy A Reduction In Your Taxable Income

The top advantage of an HSA is that it allows you to pay for medical expenses with money that isn't taxed. After you’ve opened the HSA, you can make deposits each month, up to the maximum allowed as detailed in the chart below.

These contributions lower your “taxable income,” which saves you money at tax time. So, for example, if your annual income is $70,000 but you deposited $3,000 into your HSA, you'll now only pay income tax on $67,000 of your yearly income, rather than the full amount.

Invest Your HSA Savings

But that’s not the only tax advantage you receive. Since money you put in your HSA can stay there until it’s needed, it has the opportunity to earn interest or even be invested for potential higher returns. The earnings will accrue in the HSA account, and they won’t be taxed either.

Tap Your Savings To Pay Qualified Medical Expenses

When you enroll in an HSA, you’ll be sent a debit card or checkbook that is linked to the account, allowing you to access those funds when you seek medical care. Just swipe the card or write a check from that account when you make your payment, and the money will come directly out of what is in your HSA. If you don’t have quite enough to cover the difference, you’ll need to pay the remainder using other funds.

Each HSA will come with a list of specified, qualified medical expenses, which typically include copays to doctors and dentists, along with prescriptions and medical equipment or supplies. But the list is even broader in most plans and can include hearing aids, eyeglasses, and therapies such as mental health consulting, physical therapy and chiropractic services.

Always check with your plan administrator if you are unsure whether something is covered.

There is also some leniency in using HSA funds for nonprescribed items used to fight COVID-19, thanks to the CARES Act, which authorized the use of HSAs for items such as masks, hand sanitizer and home testing. While this might be a temporary offering, it is still currently available to HSA account holders. Make sure to always confirm any expenses before assuming they are covered.

Roll Unused Balance Into Next Year’s Spending

Don’t need all those funds this year? No problem … no need to spend them on items you don’t need or forfeit them entirely. Unused HSA balances are rolled over at the end of the year (as opposed to use-it-or-lose-it Flexible Spending Accounts, which are explained in more detail below). That allows your money to continue to grow – potentially earning additional interest – until you need it in the future, even if that’s years away. It’s a wise way to save up for more extensive medical needs you might have as you age or for unforeseen treatments that otherwise would take a bite out of your bank account. 

How Much Can I Contribute?

Although the benefits are significant, there are limits to how much you can contribute each year. Here’s what you need to know.

Under 55

Total Contribution

2021

2022

Single Person

$3,600

$3,650

Family

$7,200

$7,300

Over 55

Older consumers can make additional HSA contributions up to $1,000.

HSAs Vs. FSAs: What’s The Difference?

Note that the HSA differs from another type of health savings plan, the Flexible Spending Account (FSA), which you can also use for qualified medical expenses that your insurance doesn’t cover. The main differences between HSAs and FSAs have to do with who can have one and how it is used.

An employer can offer an FSA as part of its menu of benefits to anyone, not just those who are in a HDHP. Another key difference is that unlike a HSA, the funds must be used in the same year in which they were contributed so you can’t roll them over for future expenses.

The Bottom Line: A Health Savings Account Is Good For Your Body And Wallet

HSAs are a fantastic option that allows you to save money every month on your healthcare deductible, while also saving for future potential healthcare needs. It presents a less costly option to consumers who purchase an HDHP to take advantage of its lower premiums and by reducing taxable income. In addition, HSAs can grow through investments and annual rollovers, just like other retirement savings plans. Ready to take the next step toward a solid financial future? Learn more about the opportunities in tax-advantaged savings plans, like a 401(k) retirement account.

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.