A Health Savings Account, or HSA, is similar to a personal savings account that can only be used for qualified medical expenses. An HSA has some tax advantages, but it must be paired with a High Deductible Health Plan (HDHP).
Pre-tax contributions
The biggest benefit of an HSA is that you don’t pay taxes on money that you contribute to it. So if you put in $100 every pay period, you’re keeping every penny of it. However, there are limits to the total amount you can contribute every year and the money in your HSA can only be used towards qualified medical expenses.
Employers can contribute
As an additional benefit to employees, employers can contribute toward your HSA. Keep in mind that the maximum amount that you can contribute is the combination of all contributions. So if you’re contributing $100 and your employer is contributing $100, that’s $200 towards your annual contribution limit.
Portability & Roll-Over
An HSA is similar to a personal savings account so it goes with you if you get a new job and it never expires (unlike an FSA as an example). You’ll typically get a debit card that you can use to pay for prescriptions and other qualifying medical expenses. And as a bonus, once you turn 65 you can use the money for whatever you want, you just have to pay income tax on the money that you withdraw.
Needs to be combined with a high deductible health plan (HDHP)
You can only have an HSA if you are on a high deductible health plan (HDHP). These typically have lower monthly premiums that you are required to pay, but they have a much higher deductible before your insurance carrier starts paying for medical expenses. This can have a higher financial burden than traditional insurance coverage.
Pressure to save
The combination of an HSA with an HDHP may cause people to be reluctant to find medical care because they don’t want to spend the money in their HSA (or don’t have enough). In a survey conducted by the Kaiser Family Foundation from 2019, half of adults said either they or a family member had delayed or gone without medical care because they couldn't afford the expense.
Tax penalties
If you’re under 65 and withdraw money for non-qualified expenses, you’ll incur a 20% penalty and owe income taxes on the money. Once you turn 65, you can withdraw your money without incurring a penalty, but you’ll still owe income taxes on the money.
The HSA contribution limit in 2021 is $3,600 (up $50 from 2020) for an individual with coverage under a qualifying high-deductible health plan and $7,200 (up $100 from 2020) for a family with HDHP coverage. If you are over the age of 55, you can contribute an additional $1,000 per year.
And remember that the annual contribution limit is based on ALL contributions made toward your HSA. So if your employer (or anyone else) is contributing to your HSA, it counts towards your annual contribution limit.
Disclaimer: Any articles written on this website, including this article, are not to be taken as legal or HR advice. Employment laws are constantly changing and vary by location and industry. You should consult a lawyer or HR expert for guidance. Need HR advice? We can help!
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