What is an HSA?
A Health Savings Account is a consumer-managed, tax-favored alternative to traditional health insurance created for the purpose of paying medical expenses. To open an HSA, you must be covered by a High Deductible Health Plan (HDHP). Except for preventive care, you must meet the annual deductible before the plan pays benefits.
Once you are enrolled, you own and have complete control over the money in your HSA. You make the decisions on how you want it spent, not a third party or a health insurer. You also get to decide how and where you want to invest this money to grow your account. Account funds are used to cover medical expenses before the plan deductible has been met. Unspent account balances accumulate and accrue interest from year-to-year. Unlike amounts in Flexible Spending Accounts that are forfeited if not used by the end of the year, unused funds remain available for use in later years. Once the health plan’s annual deductible has been met, coverage resembles conventional insurance, typically in the form of a preferred provider organization (PPO) with little-to-no cost sharing for in-network services, and limits on total out-of-pocket costs.
HSAs do not replace a normal or typical health insurance policy. They are designed as a supplement to a high-deductible health insurance policy. Because the HSA is tied to a high-deductible health insurance policy, you will “pay as you go” for medical care, using your tax-free HSA dollars, until you spend up to the deductible. Once you meet the deductible, the health insurance pays for most of your medical expenses for the rest of the year. You may choose your own doctor and level of care. By themselves, HSAs are savings vehicles — not insurance policies — so they do not restrict your access to coverage or your choice of providers.
What are the benefits of an HSA?
- Your own HSA contributions are tax-deductible.
- Interest earned on your account is tax-free.
- Withdrawals for qualified medical expenses are tax-free.
- Unused funds and interest are carried over, without limit, from year to year.
- You own the HSA and it is yours to keep—even when you change plans or retiree.
Who is qualified to obtain an HSA?
You must be covered by a High Deductible Health Plan (HDHP) to take advantage of HSAs. You also cannot be covered under another health insurance plan, not be enrolled in Medicare, and not be someone else’s dependent.
HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act which was signed into law by President Bush on December 8, 2003. The CARES Act expanded the list of eligible expenses by including popular over-the-counter and menstrual products which you can now purchase with your HSA retroactively to 1/1/2020.
