What’s an HSA?

Are you enrolled in a high-deductible health plan (HDHP) at work? If so, you may be offered a health savings account—an HSA—as part of your health benefit. An HSA is a tax-advantaged account that you can use to pay for qualified medical expenses that your HDHP doesn’t cover. We’ve put together a few things you need to know as you decide whether an HSA is right for you.

HDHPs and HSAs: a lot of letters that work well together

HDHPs and HSAs work hand in hand, so in order to understand one, you need to understand the other.

An HDHP is a health plan that, in exchange for a lower premium, offers a larger deductible for medical expenses than a typical health insurance plan. HDHPs also have a maximum that limits the amount you have to spend on out-of-pocket medical expenses (not including premiums). Although these plans are usually offered by an employer, you may also enroll in one offered by a financial services company. The high deductible enables HDHPs to charge enrollees a lower insurance premium—and having an HDHP is the only way to qualify for an HSA.

An HSA is a tax-advantaged savings account that you can use to pay qualified medical expenses that your HDHP doesn’t cover. Similar to an employer-sponsored retirement plan, HSAs are owned and funded by the employee, and employers may also contribute to the HSA.

With an HSA, you specify how much pretax income to contribute from each paycheck (up to annual limits set by the IRS). When you withdraw from your HSA to pay for qualified medical expenses, you may take it out tax free.1 The funds in your HSA may remain as cash savings or you may invest all or some of them, depending on your plan rules—and most HSAs have a minimum cash requirement before allowing money to be invested. The interest or investment gains your money earns is tax free. Contributions can be made up to age 65 and are eligible for Medicare. They’re yours for life, even if you change jobs, switch plans, or retire.

An HSA is an additional source of funds for paying qualified medical expenses in a high-deductible health plan.

How do HSAs work?

If you’re thinking about enrolling in an HDHP with an HSA, here’s what else you need to know. 

How to make contributions

If your HSA is provided through your employer, contributions are usually deducted pretax from your paycheck and sent to your HSA provider by your employer or payroll vendor. Your employer may make additional contributions to your HSA. If you’re not contributing through your employer, you can contribute funds directly to your HSA and write them off as tax deductions later. All contributions must be made in cash.

How to access your funds and pay for qualified expenses

Once the money is in your account, you’ll typically be able to access your funds through a debit card or checks that are linked directly to your HSA. You can use the funds in your HSA to pay for qualified medical expenses, which are defined by the IRS and include co-payments, medical supplies, prescriptions, and even eyeglasses and dental fillings.

How to save for the future

One of the great benefits of an HSA is that the money that’s in your account at the end of the year will be rolled over to the following year. You may choose to save more than what you’ll need each year in order to build a long-term savings account for future medical expenses—you can even use them in retirement.


What are the benefits and disadvantages of an HSA?

If you’re trying to decide if an HSA is the right choice for you to make with your health plan, consider the general benefits and disadvantages involved. 

Benefits of HSAs

Tax advantages

You can contribute to the account pretax, up to the annual limit; the interest or other earnings in the account are tax deferred; and the withdrawals are tax free, if you use them to pay for qualified medical expenses.

Retirement savings

Because the funds in your HSA belong to you and your balance rolls over at the end of every year, you can save money for qualified medical expenses over a long period of time.

At age 65, you can use the HSA funds for qualified medical and nonqualified expenses (including nonmedical expenses). If you spend HSA funds on nonqualified expenses, you’ll be taxed, but you won’t have to pay the 20% penalty that’s incurred on nonqualified expenses before age 65.


Contributions remain in your account until you use them. Your employer may also contribute to your account as an added and valuable benefit.

Accessible and portable

You can access the funds in an HSA using a debit card or checks. Funds roll over from year to year and are yours to keep, even if you switch jobs or retire. 

Disadvantages of HSAs


Even with the benefit of saving in an HSA, it may be difficult to meet the high deductible required in an HDHP, especially if you have high medical expenses. 

Unplanned expenses and penalties

Nonmedical emergencies come up from time to time. If you withdraw funds from your HSA for nonqualified expenses before you turn 65, you’ll owe taxes on the money you take out, plus a 20% penalty. 


HSA providers often charge monthly maintenance and/or per-transaction fees.

Is an HSA right for you? 

With so many options, deciding on a health plan for you and your family can be confusing. Because healthcare coverage is so important, make sure you take the time to understand your options before making any decisions. If you’re enrolled in an HDHP, an HSA may be the right option for you. HSAs may offer tax advantages, cover a broad range of qualified medical expenses, and be an additional vehicle for retirement savings. Most importantly, the contributions in an HSA are yours for life.

To learn more about your options, speak with your employer, financial institution, or healthcare provider.


1 This is based on the assumption that there are no excess contributions.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

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