When you have an HSA, you contribute money regularly and use that money to pay for qualified medical expenses. If you qualify for an HSA, you can open one through your employer or independently.
Even if you open an HSA through your employer, you are the owner — but it can be funded by the employee or the employer (or both). If you have an HSA through your workplace, you can set up automatic contributions directly from your paycheck.
Some employers that offer high-deductible health plans also offer HSAs. If yours doesn’t, you may be able to open your own HSA account, though you’ll only be able to fund it with cash.
Who can open an HSA?
To have an HSA, you must be enrolled in a high-deductible health plan (HDHP). For this calendar year, the deductible must be at least $1,400 for self-only or $3,000 for family coverage.1
There are some additional eligibility requirements as well. To open an HSA, you must:
- Not be enrolled in other health care plans (unless permitted by the IRS)
- Not be enrolled in Medicare
- Not be listed as a dependent on someone else’s tax return
- Be under the age of 65
What is an HDHP?
A high-deductible health plan is a type of health insurance with low monthly premiums in exchange for a higher deductible. This makes it more affordable monthly but means you’ll pay more when seeking medical care.
To fully understand how an HDHP works, you need to understand the following definitions:
- Premiums: The amount you pay each month for health insurance coverage.
- Deductible: The amount you have to pay for health care services before your insurance plan kicks in.
- Coinsurance: Once you reach your deductible, your insurer will pay a percentage of your medical costs, and you’ll pay the rest. The amount you pay is called coinsurance.
- Out-of-pocket maximum: Once you’ve paid a certain amount out of pocket (called an out-of-pocket maximum), your insurer will cover 100% of your approved healthcare expenses.
What can I use my HSA for?
After opening an HSA, you will receive a debit card linked to your HSA balance, which you can use to pay for eligible medical expenses. This includes deductibles, copays, coinsurance, and other qualified medical expenses not covered by your plan. Be aware that HSA funds generally may not be used to pay premiums.
Your HSA contributions, which have an annual cap, can be used to pay for medical, dental, and vision care and prescription drugs. Amounts withdrawn from an HSA aren’t taxed as long as they are used to pay for services the IRS treats as qualified medical expenses.
Some examples of qualified medical expenses include:
- Deductibles
- Dental services
- Psychiatric treatments
- Vision care
- Prescription drugs
- Co-pays
Consult the IRS or your employer for a complete list of qualified medical expenses. You can also ask whether you are eligible for the medical expense tax deduction, which can save you even more.
HSA vs. FSA
Although a health savings account and a flexible spending account (FSA) can help cover medical expenses, there are some crucial differences.
- Ownership: An HSA is owned by the employee, while an FSA is owned and managed by the employer.
- Eligibility: To open an HSA, you must have a high-deductible health plan. You can only get an FSA if your employer offers it, but you can get one even if you have a low-deductible plan.
- Funds: Any unused money in an HSA will roll over at the end of the year and stay in the account. With an FSA, you must use it by the end of the tax year, or you’ll lose it.
- Limitations: You may be taxed if you use money from an HSA to pay for a non-qualified expense. With an FSA, you may need to pay medical bills up-front and submit a claim for reimbursement.
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