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Home » Health, Health Insurance, HSA's

What is a Health Savings Account (HSA)?

Last updated by on 11 Comments

I recently moved from a traditional PPO health insurance plan to a high deductible health plan (HDHP) in this year’s open enrollment period.

Why? I’m young, healthy, and I haven’t been to the doctor more than a few times in the last few years (knock on wood). As such, a HDHP offers me lower premiums than a traditional health insurance plan.

That was a huge selling point, but the other big selling point of the HDHP was the access it permitted to the HSA it is paired with (which my employer contributes to).

HSA’s are a key component to HDHP’s, so it’d only be prudent to give more detail on what they are, how to use one, and what medical expenses are covered.

What is a HSA?

health-savings-accountHSA’s, or health savings accounts, are tax exempt accounts that allow you to contribute tax deductible funds that you can later use to pay for qualified medical expenses. Many HSA’s come with a debit card that makes the payment and accounting easy.

Unlike FSA’s, you own the HSA and can take it with you when you leave an employer. And when you turn 65, you can use HSA funds on not just medical expenses, but anything, without penalty.

HSA’s are very similar to traditional IRA’s or 401K’s in many ways:

  • you can contribute tax deductible contributions through your employer, much like a 401K.
  • you can invest the funds in the account.
  • there are annual maximums.
  • your employer can contribute to the account.
  • the entirety of the balance rolls over from one year to the next.

The main difference is that you can cover qualified medical expenses with the account. Many HSA’s come with a debit card for you to use to cover these expenses.

What expenses does an HSA cover?

HSA Qualified Medical Expenses

There are a lot of medical expenses that you can use your HSA funds to cover. Some of the most common include dentist and doctor visits and procedures, prescription drug costs or co-pays, laser eye surgery, eye exams, contacts, eyeglasses, chiropractor, and birth control.

If you have any medical conditions that require special equipment or treatment, these expenses are typically covered as well.

For a full list of what medical expenses are covered by a health savings account, check out IRS publication 502.

What Expenses are not Covered by an HSA?

Publication 502 also has a list of items not covered as well. But two of the biggest expenses you may be wondering about are insurance premiums and over-the-counter drugs.

Generally, you cannot use your HSA to cover insurance premiums. There are some exceptions:

  • COBRA premiums
  • Medicare
  • insurance premiums while you are unemployed

The Affordable Care Act dictated that you can no longer use HSA’s to pay for over-the-counter medicine. Ironic that it was part of the Affordable Care Act, no?

Despite these two downers, HSA’s still offer incredible benefits over traditional insurance plans when it comes to covering medical related expenses.

If it’s not in Publication 502′s covered list, you can probably assume it’s not.

HSA Contribution Maximum Limits

Much like IRA’s and 401K’s, HSA’s have annual contribution limit maximums that are adjusted every year with inflation.

The IRS HSA maximum contribution limits for 2014 are:

  • Single Plan: $3,300 (up from $3,250)
  • Family Plan: $6,550 (up from $6,450)

As with 401K’s there is a catch up contribution for those age 55 and over. The 2013 HSA catch-up contribution is $1,000 for both single and family plans.

One big difference in HSA contribution maximums vs. 401K’s is that any employer contributions must be subtracted from the maximum contribution, whereas employer 401K contributions are completely separate.

For example, if you have an individual plan and your employer contributes $1,000 to your HSA during 2014, the maximum amount you could contribute would be $2,300 ($3,300-$1,000)  if you were under age 55.

Who is Eligible for an HSA?

In order to be eligible for an HSA:

  • You must be covered under a HDHP, on the first day of the month.
  • You have no other health insurance coverage (excluding vision, dental, disability, accident, long-term care).
  • You are not enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else’s tax return.

What Happens to your HSA when you Switch Plans? Can you do a HSA Rollover?

When you leave an employer or end your participation in an HDHP, the HSA belongs to you. HSAs can be rolled over from one HSA to another if you are trying to consolidate, much like IRA’s can. You cannot roll over an HSA into an IRA or 401K.

Contributions made to an HSA belong to the participant immediately, regardless of who contributed (you or employer).

If you move back to a traditional insurance plan and stop using an HDHP, you can still use your HSA funds to cover qualified medical expenses.

HSA Vs. FSA: What’s the Difference?

If you’ve had an FSA in the past or are considering one, you are probably wondering how FSA’s differ from HSA’s. There are a few key difference between HSA’s and FSA’s.

  • You own an HSA, your employer owns the FSA.
  • You can roll over HSA funds from one year to the next, you cannot do this with an FSA.
  • You can invest funds in an HSA, you cannot with an FSA.
  • Contributions maximums between the two differ.

More Health Savings Account Info?

Check with your employer, as details around what they will contribute, HDHP premiums, and other factors may vary.

Also, check out IRS publication 969 for more on HSA’s. Also, check out my previous HDHP post for tips on determining if an HDHP makes sense for you.

Do you have an HSA? How has it worked for you?

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I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


11 Comments »
  • Amanda says:

    I don’t have one… but I want one! I’m under 26 and staying on my parent’s insurance. Can you get these without going through an employer’s health plan? Is there an IHSA? :)

  • Alana says:

    Nice article, thanks for posting the link to the IRS link, I always have to dig it up. I mentioned on your earlier HDHP article that I think HSA’s are fantastic. I certainly prefer my HSA to FSA’s because of the portability and because I’m very young and have so few annual medical expenses (knock on wood) it accumulates pretty quickly. Like having a second safety net, completely separate from my emergency fund, it’s comforting.

    It’s a definite bummer about over the counter medications not qualifying anymore, but I try not to use too much of that anyway so I guess it’s not so bad. I’m also curious about Amanda’s comment, I didn’t know MSA’s existed?

  • Sparrow says:

    HSA’s are great. They reduce your taxes by lowering your adjusted gross income, they make medical expenses cheaper since you pay with pre-tax money, and if your employer contributes you get free money.

    I agree that losing the ability to pay for over-the-counter drugs is a disappointment.

    I’d list two warnings about having an HSA:
    1) Be careful when investing this money. It’s supposed to be available for use an in emergency. So think twice about investing in volatile markets or access-limiting things like CDs.
    2) If you leave your employer, you may be on the hook for account maintenance fees that your employer used to pay. This fee is $12 per quarter for an HSA at Fidelity.

  • Her Every Cent Counts says:

    HSAs are overrated. Here’s why — I worked for one year when I had an HSA account. I put $3000 into that account (the max allowed for the year), but spent a chunk of it that year, leaving about $800. Then I went to another job. That account charges $2.25 a month to stay open, and it isn’t earning enough interest to cover that fee. Now I just want to spend the money and close out the account, I’m losing money on it, and will have none left if i keep it until retirement.

    • G.E. Miller says:

      HSA’s are overrated if your employer’s don’t contribute to them. But if they do, they can be very under-rated! You can also roll HSA’s over to a new administrator and find one with lower or no fees. So, in your personal experience, yes, I can see why you aren’t thrilled about HSA’s, but with employer’s contributions and no fees, they are of great value.

  • LaTisha @YoungAdultFinances says:

    I’ve never heard of this option. I don’t think my employer offers a high deductible plan. This looks like something I would definitely be interested in. I go to the doctor for check ups only. I wonder if this would be good for someone who is considering pregnancy soon? Having a baby is probably one of the most expensive medical life events.

    • G.E. Miller says:

      I am not sure if this is common, but my preventative annual checkup is covered by my HDHP. As far as costs of birth, each plan will vary, but you’d probably hit your annual deductible in a given year, if not the annual out of pocket maximum.

  • Sarah G says:

    What are your thoughts around balancing HSA and 401k contributions? I am switching to an HSA for next year, and my monthly payment will increase because I’m depositing enough to cover my annual deductible. Would it be unadvisable to reduce my 401k contributions to balance out the increase? It seems to me like this is like a 401k in another form, since you can use the funds for anything after age 65.

    I know it’s better to save more, but the increse in health care payments will make our budget pretty tight, and I am currently putting away 17% of my income (including my employer’s match)…

  • Erik H says:

    Where is the best place to find a no-fee HSA? What about one where I can invest the HSA funds?

    Would you say that the tax benefits of an HSA are still worth opening one even if my employer doesn’t contribute?

    Even with some fee, it seems like the risk of not spending out of an FSA in its entirety make HSA a much better choice.

    Thanks!

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