10 Things You Need to Know About Health Savings Accounts (HSAs)

A health savings account is a type of account you can use to pay for qualified out-of-pocket healthcare expenses—including deductibles and copays—and is designed to help people with high-deductible health insurance plans (HDHP) pay for such costs.

While not everyone is eligible to open an HSA, it's essential to have a broad understanding of these accounts: including how they work and how they can help you save for future healthcare expenses.

Health savings account details

You can open an HSA account with any bank, credit union, or insurance company that offers one. If your employer offers an HSA, you can open an account directly through them and thus make pre-tax contributions through payroll deductions (such as a 401k)—the exception being that if you live in New Jersey or California and make payroll deductions with your employer, contributions are taxed for state income tax purposes. If you open an HSA on your own, however, you can claim any deposits as tax deductions come tax time.

Every year, you determine the specific amount you'd like to contribute—provided that amount doesn't exceed government-mandated limits ($3,850 for individuals and $7,750 for family coverage, as of 2023). If you’re age 55 or older, you can contribute an extra $1,000 above these thresholds.

You can fund the account through a deposit, transfer, or payroll deduction and access funds to cover qualified medical expenses using a debit card or checks to pay for eligible out-of-pocket healthcare expenses. Even if you later become ineligible for HSA contributions, you can still use the funds in your account to cover qualified expenses.

HSA qualification requirements

To open an HSA, you must meet specific qualification requirements including an age of 18+ and maintaining a high-deductible health plan as your only insurance. A high-deductible plan—as of 2023—means your health plan has a minimum annual deductible threshold of $1,500 for individuals ($3,000 for families). Additional prerequisites include that you cannot be enrolled in Medicare (Part A or Part B) or Medicaid to contribute to an HSA, nor can you be claimed as a dependent on anybody else’s tax return. Click here to review all qualification requirements on the IRS website.

HSA accounts are becoming more popular

In the last five years, the number of HSA accounts has grown by more than 60% and the number of assets has increased by 250% (according to fintech firm WEX). This trend is expected to continue, per Devenir research.

A few trends are driving this growth, with the most significant likely that more employers now offer their employees high-deductible health insurance plan options to keep premiums low (for both themselves and their employees). This helps explain why HSAs have grown in popularity in the workplace (especially in companies with 500 or more employees), according to the Bureau of Labor Statistics. Other factors include the COVID-19 pandemic, which heightened overall concerns about finances. Many people have therefore increased their engagement with HSAs by contributing more or investing their assets rather than keeping them in cash.

HSAs offer many tax benefits

Health savings accounts are generally triple-tax advantaged in that you can make pre-tax contributions or claim tax deductions if you make after-tax contributions.

With HSAs, you also don’t pay taxes on any interest or other earnings on money in the account. However, if you live in New Hampshire or Tennessee, you may get taxed on your HSA earnings—such as dividends and interest—after hitting a specific threshold, depending on whether you file as an individual or jointly as part of a married couple. Elsewhere, HSA earnings are considered taxable income in New Jersey and California.

Finally, know that you can withdraw account funds to cover qualified expenses without the need to pay taxes.

Anyone can contribute

Yes, you read that right. You can ask your parents, aunts, uncles, friends (even strangers!) to help save for healthcare expenses.

You don’t need to spend your HSA balance every year

You are not required to spend your HSA account balance every year, as any leftover money automatically rolls over to the next one. Your HSA funds will continue to do so annually and remain in your account indefinitely until used. Considering that current retiree households spend over $7,000 on annual healthcare expenses (according to the U.S. Bureau of Labor Statistics), it’s easy to see why this feature makes HSAs particularly appealing.

You can enjoy a variety of investment options

Another HSA benefit is that you can invest the account balance in mutual funds, stocks, or other investment tools (choices vary by provider). While such investments can carry additional risk, these options can also help you—over time—potentially tuck away a lot more for retirement.

HSAs limit your flexible spending account (FSA) eligibility

Keep in mind that when you open an HSA, the IRS will prevent you from also owning a flexible spending account (FSA). However, if your employer allows this, you can qualify for a limited-purpose FSA and, in turn, use this exclusively for vision and dental expenses such as dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner, and prescription glasses.

Health savings accounts are portable

A portable health savings account means that money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, switch employers, or retire.

You could be slapped with taxes and fees if you don’t follow the rules

Know that if you contribute funds beyond the limits mentioned earlier, you’re on the hook for a 6% tax on these excess contributions—and that if you have an HSA through work, any contributions your employer matches also count towards your annual limit.

You should also only contribute what you can afford: because if you’re under age 65, any amount you withdraw for non-medical purposes is subject to income taxes and a staggering 20% early withdrawal penalty. After age 65, any HSA withdrawals made for non-medical uses are still subject to taxes but won’t incur this consequence.

In sum: what you should know about health savings accounts

Because we’re living longer and healthcare expenses will only continue to increase as time marches on, it’s essential to save as much as possible for future medical outlays. While several investment options can help you attain your goals, HSAs are attractive given their multiple tax advantages and because your balance can grow indefinitely.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.