What is an HSA and How Does It Work?

What is an HSA and How Does It Work – Overview

HSA or Health Savings Accounts always have several potential financial benefits for the present and future. With an HSA account, you can pay for medical expenses and save pre-tax dollars. HSA also offers several retirement benefits.

What is an HSA and How It Works

An HSA, or Health Savings Account, is created for people with high deductible health plan (HDHP) coverage. HSA accounts can save you qualified medical expenses and offer you tax advantages. Individuals or their employers can contribute to these HSA accounts.

However, the maximum amount one can contribute is limited every year. The account owner can use the invested amount for dental, medical, and vision care expenses and to buy prescribed drugs.

HSA accounts can be used for the following expenses –

  • Artificial limbs
  • Ambulance services
  • Birth control
  • Fertility enhancement
  • Drug treatment
  • Breast pumps
  • Contact lenses
  • Eye exams
  • Guide dogs
  • Lab fees
  • Medications
  • Long-term care
  • Nursing home services
  • Therapy
  • Surgery
  • Pregnancy tests
  • Weight-loss programs
  • Vision correction

Who is Eligible for an HSA Account

What is an HSA

What is an HSA – Who is Eligible?

Only a limited number of people are qualified to open an HSA account.

You should have a High-Deductible Health Plan (HDHP) that meets specific IRS (Internal Revenue Service) requirements to meet the eligibility criteria for an HSA account.

Here is a list of the IRS requirements-

  • A minimum deductible of $1,400 for self-only coverage and $2,800 for family coverage for the year 2023.
  • There is a maximum out-of-pocket limit of $7,050 for self-only coverage and $14,100 for family coverage for the year 2023.
  • You must meet your deductible range before receiving benefits other than preventive care from your plans.

How to Start a Health Savings Account

Credit unions, banks, brokerages, and other financial institutions offer Health Savings Accounts. To be eligible for an HSA, you must first meet the eligibility requirements.

According to IRS rules, you can be qualified for HSA if you meet the following criteria –

  • If you have not enrolled in Medicare
  • You have no other health coverage
  • If you are covered under any high-deductible health plan
  • You are not claimed as a dependent on someone’s tax return

Benefits of an HSA Account

There are multiple benefits to having an HSA account.

1. Tax benefits

Health Savings Accounts can offer multiple tax advantages. People who chose high deductible health plans can receive several tax benefits, including –

  • Tax-free withdrawals for qualified medical expenses
  • Tax-deferred growth
  • Tax-deductible contributions

The money you put in your Health Savings Accounts can roll over from year to year. You can use the fund next year if you have no medical expenses but have made some contributions in a year.

Even if you change employers, the money stays in your HSA account. Sometimes, you can increase your HSA amount to grow and earn interest.

2. Employer Contributions

Many employers choose to contribute to their employees’ Health Savings Accounts, but the exact percentage can vary widely between companies. Employer contributions are excluded from your gross income and are, therefore, tax-free.

3. Investment Opportunities

Health Savings Accounts can give you several investment opportunities. You can invest a part of your HSA funds and grow your money.

4. Medical Expenses

You can use your HSA funds to cover eligible medical expenses. It can help everyone to receive proper treatments for severe health conditions and speed up their recovery.

5. Earning can not Affect the Contribution

The IRS sets HSA contribution limits and are not affected by your income level.

Individuals with higher incomes often must make tax-deductible contributions to their traditional IRAs. However, regardless of how much money you make in a year, you can receive all of the tax benefits an HSA provides.

6. Withdrawal Benefits

Health Savings Accounts aim to help individuals with the cost of their medical care. HSA funds can be withdrawn anytime for qualified medical expenses without penalty or tax.

Disadvantages of HSA Accounts

There are some disadvantages to health savings accounts as well.

1. Eligibility

The primary drawback of Health Savings Accounts is that you have to be a good candidate for HDHPs to utilize their benefits.

You should have lower insurance premiums and a high deductible plan. Being able to benefit from HSA tax advantages can make you a perfect candidate.

2. Savings Pressure

Some people may find it hard to spend money in HSA accounts, especially when they do not have healthcare issues to spend the money on at that moment.

3. Tax Problems

If you want to withdraw your HSA funds for non-qualified expenses before age 65, there is a 20% penalty and income taxes. After age 65, withdrawals for non-qualified expenses are taxed as income but not subject to the additional 20% penalty.

4. Maintenance

You may need to pay maintenance fees for some health service accounts. However, this can vary by organization, but in most cases, these maintenance fees are low.


Health Service Accounts (HSA) have several advantages and disadvantages. With HSA funds, you can pay for several qualified medical services without worry. However, you must be a perfect candidate to utilize all their benefits.

See Also

What is Advance Premium Tax Credit

Difference Between Term and Whole Life Insurance

What is Healthcare FSA

IDA Grant Program

EIDL Grant

DHHS Grants

Is Canadian Healthcare Free

Current Version
March 12, 2024
Updated By
Andrea Morales G.

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