What is a Health Savings Account?

You never know when an emergency expense will come up. While these expenses can cover many categories, health emergencies are often the most costly and urgent. Saving up money and building an emergency fund can give you a financial cushion if a health emergency comes up. No one hopes to use their funds to cover medical procedures or treatment for a dire health condition. It’s ideal if those problems don’t occur, but it is better to be prepared just in case. A health savings account (HSA) can help you build emergency funds for these expenses while saving money on taxes.

What Do You Mean By a Health Savings Account?

A health savings account is a special type of account that uses pre-tax dollars. It’s designed to help individuals who have high-deductible health plans (HDHPs) and allows them to save money for qualified health expenses. 

You can save up for healthcare costs in a tax-advantaged account instead of putting the funds into a regular savings account. If you use a regular savings account, you don’t save on taxes, and it is possible to mix those emergency funds up with other expenses. 

These accounts can earn interest and earnings that do not get taxed. The maximum annual contribution is smaller than most tax-advantaged accounts. If you consistently contribute to this account each year, you can increase your preparedness for a medical emergency or a health condition.

Who Can Contribute to a Health Savings Account?

Several people can contribute to an HSA plan. These are some of the people who can put funds into a health savings account.

Account Holder

If you establish an HSA, you can put money into it. That’s because you are the account holder. You have to be covered by a high-deductible health plan (HDHP) to become an account holder.

Employer Contributions

Some employers offer HSA plans as perks for their workers. If you want to work with a company that offers this benefit, check the benefits package before you work with a company. If your company does not offer this perk, you may want to bring it up in the future. Bringing it up does not guarantee an employer will contribute to their workers’ HSA accounts, but the worst thing that can happen is the employer saying no.

Individual Contributions

Eligible individuals can contribute to an HSA, even if they are not the primary account holder. Not only do you need an HDHP, but you must also not be labeled as a dependent on someone else’s tax returns to qualify. Eligible individuals must also have no additional health coverage and cannot be enrolled in Medicare.

Family Members

Qualifying family members can contribute to HSA plans. However, these individuals must meet the same eligibility requirements as individual contributors.

What Are Health Savings Account Withdrawal Rules?

HSAs can save you money on taxes and help you with deductibles. However, there are several rules for withdrawing funds. Knowing the rules can help you pay less in taxes and ensure your money goes to qualifying medical expenses.

Eligible Expenses

HSA funds can be withdrawn tax-free for eligible medical expenses. It’s one of the only tax-advantaged accounts that lets you avoid taxes on contributions and withdrawals. However, you must use the funds for an eligible expense to get a double tax break. Medical, dental and vision expenses are typically qualified expenses, but expenses that are over-the-counter without prescriptions are usually not qualified expenses. Some over-the-counter exceptions apply, especially if they were prescribed by a healthcare professional.

Recordkeeping

When you use your HSA funds for qualifying expenses, make sure you keep the receipts for up to seven years. At any point, the IRS may request proof that you used the HSA funds for a qualifying medical expense. Having the receipts can help you avoid tax penalties. 

Tax Implications

The tax implications only take effect if you use HSA funds for non-qualifying expenses. If you do this before turning 65, you will incur a 20% penalty on top of income tax. If you make non-qualifying expenses after turning 65, you do not have to pay the penalty fee. However, you will still owe income taxes on the amount you withdraw for non-qualifying expenses.

Reimbursements

You may not have enough money in your HSA plan to cover a medical expense. In this scenario, you may have to rely on out-of-pocket funds for a medical procedure. However, you can build up your HSA funds after the procedure and reimburse yourself. This reimbursement allows you to get the tax benefits of an HSA plan even though you paid out-of-pocket.

Coordination With Other Health Accounts

If you have multiple health plans, you have to consider how the rules and funds overlap and what is off-limits. HSA funds typically cannot be used to cover medical expenses if you already used a health reimbursement arrangement (HRA) or a flexible spending account (FSA) to reimburse those costs. You cannot open an HSA if you already have an HRA or FSA.

If you opened an HSA before getting an HRA or FSA, you may be able to use HSA funds for dental and vision expenses that are not covered by the HRA or FSA.

Is a Health Savings Account Right for Me?

An HSA lets you save money on taxes and build extra reserves to cover health and medical expenses. You never know when one of these costly procedures can become necessary and urgent. Saving money in a tax-advantaged account can fortify your finances in case something happens. If you do not use the funds for qualifying medical expenses, you can wait to turn 65 to withdraw the money without incurring penalties. 

Consumers should consider if they can put money on the sidelines for health procedures. They should also consider if it is okay to have this money inaccessible until you turn 65 if you don’t end up using it for a medical procedure. These accounts have advantages and disadvantages, and it’s important to weigh them both carefully before making a decision.

Invest in Your Health

A health savings account gives you the financial resources to cover medical expenses. You can save money in one of these tax-advantaged accounts and use the funds when needed for qualifying costs. An HSA plan is a useful resource to consider.

Frequently Asked Questions