While signing up for health insurance, you may have noticed an option to set up a health savings account, or HSA. An HSA can be a powerful, tax-advantaged tool to help save for medical expenses. These accounts can be an effective way to limit health care costs and save for expenses your insurance doesn’t cover. However, not everyone qualifies. Here’s how to know if you qualify and what you need to know about how HSAs work.
Who qualifies for an HSA?
You can qualify for an HSA only if you are enrolled in a high-deductible health insurance plan (HDHP). Monthly premiums for HDHPs tend to be much lower than those offered by other plans, which can save you money in the short term. HSAs can help cover the gap between what these plans cover and other medical expenses that arise.
The federal government defines a high-deductible plan based on deductible size and the maximum amount you have to pay out of pocket for your health insurance plan. For 2022, an individual plan with an out-of-pocket maximum of $7,050 or more and a minimum deductible of at least $1,400 qualified as an HDHP. For a family plan to qualify as an HDHP, it must have an out-of-pocket maximum of $14,100 or more, with a minimum deductible of at least $2,800.
Your employer may offer access to an HSA within the health care plan. If it doesn’t, you can open one yourself through your bank, credit union or brokerage firm. If you’re unsure whether you qualify, check in with your employer’s human resources department, or call your insurance provider’s member benefits department.
How an HSA Works
The federal government sets a cap on the amount you can contribute to your HSA each year. For 2022, the limit for individuals is $3,650, while the limit for families is $7,300. Adults 55 and over can make an additional catch-up contribution of $1,000. Contributions for a given tax year can be made any time during the year up to April 15 of the following year. The balance in your HSA rolls over each year, unlike flexible spending accounts, which don’t allow rollovers.
If your HSA comes through your employer, you can often set up direct deposits from your paycheck into your account. You can also make deposits from your bank or brokerage account. Once you have money in your HSA, you can also invest it in mutual funds and stocks.
To spend the money in your account, you will receive a debit card associated with your HSA. You can use it to cover qualified medical expenses that your health care plan doesn’t cover.
Qualified expenses include, but are not limited to:
- Eyeglasses and contacts
- Breastfeeding supplies
- Hearing aids
Keep records of your purchases in case the IRS asks you to prove that they are qualified expenses during an audit.
If you’re over 65 and enrolled in Medicare, you can no longer contribute to an HSA. However, you can continue to spend the money in an existing HSA account as long as you use it for qualified expenses like those listed above.
There are three main tax advantages to holding a health savings account.
First, if you contribute to your HSA via payroll deduction, you can put pretax money into your account, which lowers your taxable income, so you’ll owe less income tax.
Second, any growth in your HSA is tax-free. That means you can take advantage of the magic of compounding interest.
Finally, as long as you’re using the money in an HSA to cover qualified expenses, you don’t owe income tax on your withdrawals. That said, withdrawals made to cover unqualified expenses will be taxable.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.