We're here to help you understand the health care jargon that often gets in the way of good health. Head over our glossary of healthcare terms specifically written for patients

Next up: Health Savings Account (HSA).

If you’re in a rush:
An HSA lets you or an employer contribute pre-tax dollars to an account that can be used for certain health care expenses. HSAs can be a great way to get smart about how you spend your health care dollars, while maximizing your employee benefits.

What is a Health Savings Account (HSA)?  How does it work?

A health savings account, or HSA, is a tax-advantaged medical savings account available to anybody enrolled in a high-deductible health plan (HDHP). Any funds added to this account - either by you or your employer - are not subject to federal income tax at the time of deposit. You can use your HSA funds to pay for copayments, coinsurance, deductibles, and other qualified medical expenses.

Withdrawals to pay eligible medical expenses are tax-free. Unspent HSA funds roll over from year to year, allowing you to build tax-free savings to pay for medical care later.

Am I eligible for an HSA?

Anybody who is enrolled in a high-deductible health plan is eligible for an HSA - regardless if you get your health insurance through an employer or if you’ve purchased an individual plan. Wondering if you’re enrolled in an eligible health care plan? HDHPs are plans that have a higher deductible than a traditional insurance plan. 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. According to healthcare.gov, “an HDHP’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.”

If your deductible is over $1,400 per year (or $2,800 for a family) you probably have an HSA-eligible high deductible plan. Non-HDHP plans are generally not eligible for HSAs.

HSA contribution limits change year to year, but not by much. For the 2022 tax year, you’ll only be able to contribute $3,650 to an HSA as an individual, or $7,300 for families. Sometimes employers elect to match individual HSA contributions. Meaning that if you put $100 into your HSA, your employer will, too. Always check with your employer or benefits administrator before setting up your HSA. You don’t want to leave money on the table!

What are the Benefits of Having an HSA?

HSAs have a tremendous number of benefits. Sometimes called the “holy grail” of retirement accounts, opening an HSA can be a smart way to not only put money away to spend on out-of-pocket medical expenses, but also a chance to get some great tax benefits. When you contribute money to an HSA, you contribute pre-tax dollars that you can then spend on medical expenses like co-pays during a doctor’s visit, prescription medication, and more.

Depending on what you’re using funds for, you may need to submit a receipt to your HSA trustee for reimbursement, although generally, you’re able to just use your HSA card like a debit card.

Best part? You can make these contributions every single tax year - provided you’re still enrolled in a qualified high-deductible health plan.

What Can I Pay for Using an HSA?

You can pay for any number of qualified medical expenses with your HSA card. This includes copays, coinsurance, out-of-pocket liabilities from a doctor’s visit, prescription and over-the-counter medication, and even things like covid tests, hand sanitizer, masks, tampons, dentures, counseling, postnatal supplies, bandaids, and more.

After setting up your HSA, you’ll receive a card in the mail. This card functions much like a debit card and can be used at the point of sale.

There are, of course, limits to what’s considered a qualified expense. For example, while you can pay for things like prescription or over-the-counter drugs, copays, and more using your HSA, you can’t pay for your insurance premiums, as they fall under a list of special exemptions. Note that your HSA can cover qualified premiums, including Medicare, COBRA, and any long-term care insurance.

What are qualified medical expenses?
Qualified medical expenses are items or services that you can purchase with your HSA card - or submit for reimbursement to your HSA bank. Always check with your health plan administrator whether something is covered by your HSA, as this list can change.

Below, we’ve compiled a list of some common qualified and unqualified medical expenses. For a more complete list, click here.

HSA-eligible Not HSA-eligible
Babysitting, childcare, nursing services for healthy children
Acne treatment
Controlled substances
Allergy Medication
Cosmetic surgery
Artificial limbs and teeth
Diaper services
Bandages or Band-aids Funeral expenses
Birth control pills Hair transplants
Body scans Illegal treatments or surgeries
Breathing strips Maternity clothes
Breast pumps & supplied Swimming lessons
Breast reconstruction surgery Teeth whitening
Chiropractic treatments Veterinary expenses
Cold or cough medicine
Contact lenses
Copays and coinsurance
Covid tests (rapid or PCR)
Dental treatment
Diagnostic services
Drug addiction services
Eye exams
Eye drops
Eye glasses
Eye surgery
Fertility enhancement
Guide dogs and other service animals
Hand sanitizers or hand wipes
Hearing aids
Heartburn medicine
Home care
Lab fees
Lactation expenses
Long-term care
Long-term care insurance premiums
Menstrual cups or pads
Nasal spray
Nursing care
Optometry services
Period panties
Physical exams
Pregnancy tests
Psychiatric care
Sleep aids
Special education
Vision correction
Weight loss surgery

Source: smartasset.com 

Note: some services or items will require an official diagnosis from a physician in order to avoid tax penalties. These may include, but are not limited to:

  • Breast implants removal
  • Cosmetic procedures
  • Electric toothbrushes
  • Home and vehicle modifications 
  • Massage therapy
  • Mattresses, pillows, and special bedding
  • Meals and lodging while undergoing medical treatment
  • Vitamins  and/or supplements 
  • Weight loss programs

Is an HSA Right for Me?

Any decision that impacts your health coverage and finances is ultimately a personal one, but when it comes to HSA, most agree that there are very few downsides. The biggest disadvantage of opening and contributing to an HSA is that you’ll lock up those dollars in your HSA account, which can only be spent on medical expenses. Should you choose to withdraw your HSA contributions or use your funds for non-medical expenses, you’ll pay a 20% penalty on your withdrawal. That cash will also be treated by the IRS as taxable income.