What is an HSA and How Does It Work?

What is an HSA What is an HSA

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 Does It Work?

An HSA, or Health Savings Account, is created for people with high deductible health plan (HDHP) coverage. HSA accounts can save some 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 owner of this account can use the invested amount for dental, medical, and vision care expenses and 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 can fulfill specific IRS (Internal Revenue Service) requirements to meet the eligibility criteria to have an HSA account.

Here is a list of the IRS requirements-

  • A minimum deduction of $2800 for a family plan and $1400 for self-only plans
  • A maximum deduction of $14100 for family plans and $7050 for self-only plans
  • You must meet your deductible range before receiving any benefits other than preventive care from your plans.

How to Start a Health Savings Account?

Institutions like credit unions, banks, brokerages, and other financial institutions offer Health Savings Accounts. To be eligible for 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 also increase your HSA amount to grow more and earn interest.

2. Employer Contributions

More than 80% of employers contribute to their employee’s Health Savings Accounts to help them pay for their medical expenses. However, you will not get any tax benefits from your employer’s contributions, but you can get some free money and grow it with good investments.

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

How much money you make in a year can not limit the contribution you want to make to your HSA funds.

Individuals with higher incomes often need to 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 that an HSA provides.

6. Withdrawal Benefits

Health Savings Accounts aim to help individuals with the cost of their medical care. You can withdraw your HSA funds whenever you want to pay for eligible medical services.

Disadvantages of HSA Accounts

There are some disadvantages of 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 receive benefits 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 you are 65, there are a 20% penalty and income taxes. Even after age 65, you still need to pay income taxes if you withdraw your money for something non-eligible.

4. Maintenance

You may need to pay some 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 any worry. However, you need to 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?

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