Traditional PPO plans have high monthly premiums. For this reason, many employers offer high-deductible health plans (HDHPs) with lower premium costs and then pair this coverage with health savings accounts (HSAs) to help employees reduce their health care expenses.
It's like a "Health 401(k)"
In simple terms, a Health Savings Account (HSA) is like a “health 401(k)” you can dip into now—or let it build to pay for qualified health expenses after your retire.
- An HSA is a personal bank account
- Like a 401(k), the money is yours to keep even if you change employers (or insurers)
- Your employer may choose to contribute funds into your HSA (even if you don't contribute yourself)
- HSA funds rollover year-to-year
- Funds are always available to pay for qualified medical expenses
- Save your receipts and reimburse yourself—now or any time in the future
- HSAs have a triple tax advantage—pay qualified health expenses while saving on federal taxes
Did you know...? Even if your employer doesn't offer an HSA, you can open one at your banking institution.
Triple Tax Advantage
HSAs provide a triple tax advantage—contributions, investment earnings, and funds distributed (used) for qualified health expenses are all exempt from federal income tax, FICA tax and most state income taxes. Tax-free means less money comes out of your pocket.
- Contributions to an HSA are not federally taxed;
- Funds in an HSA grow tax-free; and
- Funds used to pay for qualified medical expenses are not taxed.
Because an HSA offers potential tax savings, federal tax law imposes strict eligibility requirements for HSA contributions.
Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s HSA eligibility is determined monthly, and, as a general rule, contributions can only be made for the months in which the individual satisfies all of the HSA eligibility criteria.
Participating in a general-purpose health Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) will prevent HSA eligibility. This applies whether you are the account holder or simply if your expenses can be reimbursed ("covered") under an account holder (such as your spouse).
Also, care needs to be taken if you are moving off an FSA to an HSA. If you have unused funds in an FSA, and your employer allows a grace period or rollover, you may violate your HSA eligibility.
HSA eligibility is determined on the 1st of each month. To enroll in (and contribute funds into) a Health Savings Account (HSA), an individual must:
- Be covered by a HSA-eligible High Deductible Health Plan (HDHP): $1,350 individual/$2,700 family minimum deductible (for 2018 and 2019)
- Not be covered by any other health coverage (only the HDHP)
- Not be enrolled in Medicare (see Medicare and HSAs)
- Not be eligible to be claimed as a dependent on another person's tax return (even if that person doesn't claim you as a dependent)
Did you know...? Even if you no longer qualify to contribute to an HSA, you can always continue to withdraw funds from your HSA to pay for qualified medical expenses.
Can I pay for my family's expenses?
Yes. In addition to your spouse, you can spend your HSA dollars on your children or any other dependents you can claim on your tax return. You can pay for spousal and dependent expenses even if they are not covered on your High-Deductible Health Plan (HDHP).
Did you know...? If your adult child is covered by your HSA-eligible health plan and can no longer be claimed as a dependent on your income taxes, they can likely open their own HSA—as long as they meet the eligibility requirements.
10 Myths About Health Savings Accounts (Kiplinger, 11/2/18)
High vs Low Deductible Health Plan
HSA, FSA, HRA Comparison Table
HSA Contribution Limits
HSA Receipt Documentation
HSA and FSA in the Same Year
Switching from a Health FSA to an HSA