Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged account set up for or by people who have high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions to the account are made by the individual or their employer and are limited to a certain amount each year. The money you put in is invested and can be used to pay for things like medical, dental, vision, and prescription drug costs.

Important takeaways

  • A Key LessonSA Health Savings Account (HSA) is a tax-advantaged account designed to help people save for medical expenses not covered by high-deductible health plans.
  • Contributions to a Health Savings Account, earnings from the Health Savings Account (HSA), and distributions used to pay for qualified medical expenses are all tax-free.
  • An employee-owned Health Savings Account (HSA) can be funded by both the employee and the employer.
  • Contributions are vested, and any money left in an account at the end of the fiscal year that wasn’t used can be moved to the next year.

How Does a Health Savings Account (HSA) Work?

As previously stated, people with HDHPs can open HSAs. Individuals with HDHPs may be eligible for HSAs, and the two are frequently combined. To be eligible for an Health Savings Account (HSA), the taxpayer must meet the Internal Revenue Service’s eligibility requirements (IRS). An eligible person is someone who:

  • Is there a qualified HDHP?
  • has no other health insurance.
  • is not a Medicare beneficiary.
  • is not claimed as a dependent on the tax return of someone else.

In 2022, the maximum Health Savings Account (HSA) contribution for an individual is $3,650 ($3,600 in 2021) and $7,300 for a family ($7,200 in 2021).

The annual contribution limits apply to the total amount contributed by both the employer and the employee. Individuals who are 55 or older by the end of the tax year can make an additional $1,000 catch-up contribution to their HSAs.

Certain financial institutions can also open an Health Savings Account (HSA). Contributions are only accepted in cash, whereas employer-sponsored plans can be funded by both the employee and the employer. Any other person, such as a family member, can contribute to an eligible individual’s HSA. People who are self-employed or don’t have a job can also put money into an HSA, as long as they meet the requirements.

Individuals who enrol in Medicare for the first time are no longer eligible to contribute to a Health Savings Account (HSA). They can, however, receive tax-free distributions for qualified medical expenses, as discussed below.

Particular Considerations

HDHPs have higher annual deductibles than other health plans but lower premiums. The financial benefit you get from an HDHP’s low premium and high deductible depends on your own situation.

For the 2022 tax year, the minimum deductible required to open an Health Savings Account (HSA) is $1,400 for an individual and $2,800 for a family. For the 2022 tax year, the plan must also have an annual out-of-pocket maximum of $7,050 for self-coverage and $14,100 for families. These limits limit your out-of-pocket expenses.

Additional qualified expenses are divided between the individual and the plan when an individual pays qualified medical expenses equal to a plan’s deductible amount. For example, the contract may say that the insurer will pay for 80% to 90% of qualified expenses and the plan holder will pay the remaining 10% to 20% or a set copay.

Using this guide, a person with a $1,500 annual deductible and a $3,500 medical claim pays the first $1,500 to cover the annual deductible. The insured pays 10% to 20% of the remaining $2000, with the rest covered by the insurance company.

Once the annual deductible is met in a given plan year, any additional medical expenses, with the exception of any uncovered costs under the contract, such as copays, are typically covered by the plan. To cover these out-of-pocket expenses, the insured can withdraw funds from a Health Savings Account (HSA).

The Benefits and Drawbacks of an HSA

Health spending accounts have both advantages and disadvantages. The impact of these accounts is entirely dependent on your personal and financial circumstances.


Employer contributions and individual contributions to an Health Savings Account (HSA) via payroll deduction are not taxable to the employee. Direct contributions to an HSA by an individual are tax-deductible from the employee’s income. Earnings in the account are tax-free as well.

Excess contributions to a Health Savings Account (HSA), on the other hand, are taxed at 6% and are not deductible.

If the money from your HSA is used for qualified medical expenses, as defined by the IRS, then you don’t have to pay taxes on the money.

When figuring out if the HDHP plan’s deductible has been met, the distributions that were used to pay for medical costs covered by the HDHP plan are taken into account.

You can also invest the money in your HSA in stocks and other securities, which could give you higher returns over time.


The most obvious disadvantage is that you must qualify for an HDHP. You must have a high-deductible plan and lower insurance premiums, or you must be wealthy enough to pay for high deductibles and get the tax benefits.

Individuals who fund their own HSAs, whether through payroll deductions or directly, should be able to set aside enough money to cover a significant portion of their HDHP deductibles. Individuals who do not have enough money to put aside in an Health Savings Account (HSA) may find the high deductible amount burdensome.

HSAs also have rules for contributions, withdrawals, and distributions, as well as record-keeping requirements that may be hard to keep up with.

Withdrawals from an Health Savings Account (HSA) are permitted.

Withdrawals from an HSA are not taxed if they are used to pay for services that the IRS considers to be qualified medical expenses. Here are some fundamentals you should be aware of:

  • Deductibles, dental services, vision care, prescription drugs, copays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan are examples of qualified medical expenses. The CARES Act expanded these provisions.
  • Insurance premiums do not qualify as a qualified medical expense unless they are for Medicare or other health care coverage (if you are 65 or older), for health insurance when receiving health care continuation coverage (COBRA), for coverage when receiving unemployment compensation, or for long-term care insurance, subject to annually adjusted limits. Medicare supplemental or Medigap policy premiums are not considered qualified medical expenses.

If an HSA distribution is used for anything other than a qualified medical expense, the amount is subject to both income tax and a 20% tax penalty. But once a person turns 65, they no longer have to pay the 20% tax penalty. Instead, they only have to pay income tax on non-qualified withdrawals.

HSA Contribution Guidelines

Contributions to an HSA are not required to be used or withdrawn during the fiscal year. They are vested, and any unused contributions can be carried forward to the next year. Furthermore, an HSA is portable, which means that if employees change jobs, they can keep their HSAs.

An HSA plan can also be tax-free transferred to a surviving spouse upon the account holder’s death. If the designated beneficiary is not the account holder’s spouse, the account is no longer treated as an HSA, and the beneficiary is taxed on the account’s fair market value, less any qualified medical expenses paid from the account by the deceased within a year of death.

Flexible Savings Account vs. Health Savings Account

The Health Savings Account (HSA) is frequently contrasted with the Flexible Savings Account (FSA). While both accounts can be used for medical expenses, there are some significant differences between them.

  • FSAs are plans provided by employers.
  • FSAs are only available to employees.
  • Unused FSA funds in a given tax year cannot be rolled over and are forfeited when the year ends.
  • In contrast to HSA contributions, your FSA contribution amount is fixed.

For the 2022 tax year, the maximum contribution to an FSA is $2,850.

Can I open an HSA if I work for myself?

Yes. Anyone with an HDHP can open a Health Savings Account (HSA). If you work for yourself, you can look into HSAs offered by brokerages or banks such as Fidelity, HealthEquity, or Lively. Make sure you look into your options carefully to make sure you get the best HSA for your needs.

Do I have to spend the entire amount in my HSA every year?

NoUnlike an FSA, contributions to an HSA can be carried forward year after year. Because the funds can be invested, users can save for more serious medical needs or use them as investment funds after retirement.

Can I use my HSA funds to pay for my insurance premiums?

No, in most cases. Most medical expenses, such as doctor’s appointments, prescriptions, or over-the-counter medications, are covered by HSAs, but not your monthly premium. The only exception is when the funds are used to pay Medicare premiums or other healthcare continuation coverage, such as COBRA, while you are receiving unemployment benefits. You can also use your Health Savings Account (HSA) to pay for long-term care insurance.

In conclusion,

Overall, HSAs are one of the best tax-advantaged savings and investment vehicles available under the United States tax code. They are often referred to as “triple tax-advantaged” because contributions are tax-free, the money can be invested and grow tax-free, and withdrawals are tax-free as long as they are used for qualified medical expenses.

Medical expenses tend to rise as a person ages, especially once they reach retirement age and beyond. If you qualify, starting a Health Savings Account (HSA) at a young age and allowing it to accumulate over time can help you significantly secure your financial future.