What’s a Health Savings Account (HSA) and Should You Get One?

WRITTEN BY: Craig Sturgill


A Health Savings Account (HSA) can be a great way to save for medical expenses and reduce your taxable income. However, the health insurance plan that HSAs require isn’t for everyone. Learn more about how HSAs work, the qualifications, and the pros and cons.

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged account that helps individuals enrolled in qualifying high-deductible health plans (HDHPs) save for qualified medical expenses. You and your employer can both contribute.

How does an HSA work?

An HSA works like a savings account. Either you or your employer can put money into the account, but only you own the money in the account. No taxes are owed on the money you put into an HSA. Instead, funds are withdrawn tax-free to pay for eligible expenses.

You can use these funds to pay for medical costs until your plan’s deductible is reached. After that, the money can pay coinsurance or copays until you reach the out-of-pocket limit on your HDHP. 

Do you qualify for an HSA?

You could qualify for an HSA if you enrolled in an HDHP that meets government criteria. The IRS re-defines these plans yearly to determine the minimum deductible and the maximum out-of-pocket spend. However, not every HDHP will qualify you for an HSA. Look for “HSA-eligible” plans to guarantee you’ll qualify.

In addition to an HSA-eligible HDHP, other qualifications include:

  • No other medical coverage
  • Not currently enrolled in Medicare
  • Not a dependent claim on someone’s tax return

Can you use your HSA for your whole family?

You can. Per Publication 969, your HSA can be used for:

  • Yourself and your spouse (regardless of how you file)
  • Any HSA-eligible dependents claimed on your tax return (your children or a qualifying relative dependent) and any children who are claimed on your ex-spouse’s tax return 
  • Anyone you could have claimed as a dependent but didn’t because:
    • they filed a joint tax return,
    • earned more than $4,300 (in 2021), or
    • they’re dependent on someone else’s tax return

Advantages and disadvantages of an HSA

HSAs offer many tax benefits, but there are also some things to consider before enrolling in an HDHP to make those tax-free contributions. 

Benefits of a health savings account

Your taxable income excludes employer contributions and/or payroll deduction contributions. Any direct contributions are also 100% tax-deductible.

Distributions from an HSA are tax-free as the funds are used for qualified medical expenses. If the expenses are covered under your HDHP plan, they’ll be used to determine if the HDHP’s deductible has been met. 

HSA money can also be invested in stocks to potentially allow for higher future returns. Your money also grows tax-free with interest.

Disadvantages of a health savings account

To open an HSA, you must be a good candidate for an HDHP. This plan will offer a high deductible with a lower premium, so you must ensure you can afford the high deductible to benefit from the tax advantages. 

HSAs also have filing requirements with contributions and specific withdrawal rules; you must keep organized records. 

What are the tax benefits of an HSA?

Whether you contribute $100 or $7,300, HSAs offer three tax-free advantages: 

  • Contributions: Whether your employer drops funds from your paycheck into your account or you’re making your contributions, it will not be counted as income.
  • Growth: Once your money is in your HSA, it grows with interest tax-free. 
  • Withdrawals: Whether you need to withdraw this year or in 5 years, you can take your money out tax-free as long as it’s for a qualified expense. 

How to start a health savings account

If you get insurance through your job, ask your insurance company or employer for recommended banks and credit unions. You can also open an HSA with your checking or savings account.

Individuals pay their contributions in cash. Both employees and employers can fund employer-sponsored plans with payroll deductions. A family member or dependent can also contribute to an eligible individual’s HSA. 

How to determine if you have a high-deductible health plan (HDHP)

A high-deductible health plan describes a health plan with a higher deductible than a traditional insurance plan. While the monthly premium is usually lower, you must reach your deductible before the insurance company starts to pay its share. 

For 2022, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. This plan’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (Note that this limit doesn’t apply to out-of-network services.)

What’s the contribution limit for an HSA?

The federal government limits how much you can contribute in one year based on whether you have individual or family coverage. This year, the limit on HSA contributions is $3,650 for individuals and $7,300 for family coverage. If you’re 55 or older, you can also make catch-up contributions of an additional $1,000. 

What are HSA-eligible expenses?

Qualified medical expenses include deductibles, vision care, prescription drugs, birth control, dental services, copays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. The IRS outlines HSA-eligible expenses in Publication 502, Medical and Dental Expenses.


What does HSA eligibility mean?

“HSA eligible” refers to HDHPs that can be used with an HSA. If you aim to open an HSA, look for this term when shopping for health care plans to ensure it meets the qualifications. 

What does a health saving account not cover? 

Generally, you can’t use your HSA to pay for expenses that don’t meaningfully promote proper body function or prevent or treat illness/disease. Examples include maternity clothes, nutritional supplements, and child care for healthy babies.  

Is there a tax penalty for having an HSA and an FSA?

No, but you cannot open and contribute to an HSA while participating in a general health FSA. However, certain FSAs allow for HSA participation, so it’s essential to understand the differences between HSAs and FSAs and check with your provider before making any decisions.

How does a health savings account help you?

An HSA can lower your taxable income, pay health care costs, and help retirement savings.

Who is an HSA suitable for?

If you’re generally healthy and have the cash flow to put money aside, an HSA can be an appealing option. You can use that money to offset medical care costs after retirement if you’re also near retirement. 

Is a health savings account right for you?

HSAs can be a great way to save for medical expenses and reduce your taxable income. But you will first need to decide if an HDHP suits you. Get quotes from multiple companies to compare the best plans in your area.

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