What Is a Health Savings Account (HSA)? How Does It Work?

A health savings account (HSA) is a tax-advantaged account made for saving for medical expenses. You can only create and contribute to an HSA if you have a qualifying high-deductible health plan (HDHP). The funds contributed to your HSA can only be used for eligible expenses, like copays or prescriptions. HSAs are great employee benefits for those who have expected medical expenses and can afford to set aside money from their paycheck.

By Mariah Flores

There are many factors that come into play when job seeking, including employment benefits.?

As more people seek better work-life balances, there’s also an increased expectation of better workplace perks and benefits, including health plans. Many employers want to retain and attract top talent, so they’re going the extra mile to show that they truly care about their workforce’s health, well-being and lives outside of the office — through unique employee benefits, like pet insurance or signing bonuses.

With so many options to choose from — whether you’re job seeking,? just starting out at a new job, or are looking to adjust your current plans — it can be hard to know what benefits to select and prioritize.

You can best prepare yourself during your job search or enrollment time by familiarizing yourself with possible benefit and perk offerings … though the benefits you do elect are ultimately dependent on your personal circumstances.

One benefit to consider this enrollment season? A health savings account, otherwise known as an HSA (not to be confused with an FSA).?

Defining a Health Savings Account

What exactly is a health savings account (HSA)??

The answer is hidden right in the title. Katherine McCord, president and people operations consultant of Titan Management, views an HSA as “one of the most self-explanatory benefit titles that there is.”?

“It's a savings account specifically geared towards your health and medical costs. [Y]ou put money in and then you can withdraw that money tax-free, but it's only to be applied to medical costs,” she says.

How It Works

Only individuals who have qualified high-deductible health plans (HDHPs) can create and contribute to an HSA, which can be funded by both an employee and their employer — though employers aren’t required to contribute anything.?

That said, many employers may choose to contribute set amounts or even match their employees’ HSA contributions. Those contributions are not subject to federal income tax and can be excluded from the employee’s income. However, you need to be aware of contribution limits.

“The IRS sets annual limits on the amounts that may be contributed to the HSA,” writes SHRM. “If an HSA is funded by contributions from both the employer and the employee, it will be important to ensure that the total contributions remain within the annual IRS limits.”

The maximum contribution in 2023 is $3,850 for self-only coverage and up to $7,750 for family coverage into an HSA.

Any excess contributions may become taxable income for the employee.

Additionally, your HSA funds roll over into the following year, as opposed to an FSA — which typically requires all funds to be used by the end of the plan year.? “HSA funds roll over year to year if you don't spend them. An HSA may earn interest or other earnings, which are not taxable,” shares HealthCare.gov.

This aspect allows you more flexibility to invest your funds in preparation for larger medical expenses or a retirement investment fund.

“What if I change jobs?” HSAs are portable, meaning you can keep yours.

Spend Your HSA Wisely

The tax-advantaged HSA allows you to set money aside on a pre-tax basis, as McCord notes, specifically for qualified medical costs, including deductibles, copayments, coinsurance, and some other expenses, possibly lowering your overall health care costs.

There’s very little leeway from the government when it comes to what are and aren’t HSA-eligible expenses. You can use your funds when paying for doctors visits, dental services? prescriptions, co-pays, medical equipment and more.

NerdWallet provides other examples of qualified medical expenses, like:?

• Medical services (like home care)
• Psychological counseling
• Chiropractic services
• Physical therapy
• Hearing aids
• Eyeglasses
• Imaging

“You can also use the funds to reimburse yourself for any qualified medical expenses that your insurance didn’t cover and you had to pay out of pocket.”

Non-HSA eligible expenses include: vacations, vitamins or supplements that are taken for general health, funeral costs, elective cosmetic procedures or healthcare premiums (unless you meet certain criteria).

Note: The list of qualified medical expenses was expanded by the CARES Act.

Investopedia reports that for any distributions made from an HSA to pay for anything other than a qualified medical expense, “that amount is subject to both income tax and an additional 20% tax penalty.” If you’re 65 years of age or older, the tax penalty is eliminated and only income tax applies for those nonqualified withdrawals.

In short, always make sure to double-check what expenses are covered by your HSA before swiping your card or withdrawing funds.?

Is an HSA Right for Me?

An HSA is a great benefit option for those trying to save for expensive medical bills while reducing their taxable income — it’s commonly referred to as “triple tax advantaged.”

Nonetheless, it’s not for everyone.

“Do you have a high-deductible health insurance plan? Do you think you will have medical expenses that you need to pay for? And can you afford to take a withdrawal from your paycheck for the HSA? Get started by answering these three questions before deciding whether an HSA account is the way to go for your health insurance plan,” advises Michael McDonald, Ph.D., in his LinkedIn Learning course, “Financial Basics Everyone Should Know.”

You can invest the money contributed to your HSA, allowing it to grow overtime tax-free. Any withdrawals are also not taxed (when used for eligible expenses).?

McCord highly recommends HSAs for those who have expected medical expenses, including herself.

“So for instance, with myself, I have more health problems than most 70 year olds. So somebody like me, [it] would really behoove you to just monthly put away money so that when something big comes up, you can go, ‘Okay, here's the money for that.’”

And those who are 40 and older should also consider seeking out HSAs as an employee benefit, she notes. “You're more likely to have the unexpected happen."

A bit younger? Consider building up an HSA early on in your career, as medical expenses and needs tend to increase the older you get.

HSAs can be opened through some financial institutions or health insurance companies. Consult with your human resources department regarding employer-sponsored plans, along with other employee benefits.

Top Takeaways?

A health savings account (HSA) can be a great employee benefit, especially for those with expected medical expenses.

• An HSA is a savings account specifically geared towards your health and medical costs. You put in money and then you can withdraw that money tax-free, for qualifying medical costs.
• Only individuals who have qualified high-deductible health plans (HDHPs) can create and contribute to an HSA.
• HSAs can be funded by both an employee and their employer, however, employers are not required to contribute.
• The IRS sets annual limits on the amounts that may be contributed to the HSA.
• HSA funds roll over into the following year.