What is an HSA?

A health savings account, or HSA, is a tax-advantaged account you can use to pay for qualified healthcare expenses such as hospital visits, first aid kits, ambulance rides, eyeglasses, surgery, prescription and over-the-counter medications and more.

While HSAs can be a great way to save on expenses today, these accounts also present a unique opportunity for you to save and invest your money for future healthcare expenses.

In this article, we’ll cover the basics of what you need to know about opening, funding and using a health savings account. We’ll also answer a few basic questions you may have about the advantages and disadvantages of this account type.

What is an HSA, and how does it work?

An HSA is a tax-advantaged savings account where you can save and invest money with the intent of using these funds to pay for qualified healthcare expenses now or in the future.

HSAs are an excellent way to save because they’re “triple” tax-advantaged:

1. First, contributions to the account can be made pre-tax, or if you make contributions with post-tax dollars, you can deduct the amount from your taxable income when you file your tax return.
2. Second, any earnings from interest, dividends, investments or other sources are received tax-free.
3. Finally, when you use the money for eligible healthcare expenses, you receive the money tax-free.

These tax benefits can help you build a significant balance to help you pay for healthcare expenses today, tomorrow and into the future.

Who can enroll in an HSA?

Anyone can open an HSA; however, the IRS has specific requirements that must be met in order to contribute money to the account. Even if you can’t contribute, you can open a new HSA and move funds from your current HSA to take advantage of better features, higher interest rates, better investment options, etc.

Per the IRS rules in order to contribute to an HSA, you must meet all the qualifications below:

• You must be covered by a high-deductible health plan (HDHP), otherwise known as an HSA-qualified health plan.
• You cannot be covered under other, non-HSA-qualified health insurance.

Examples of disqualifying coverage :

• A spouse’s non-HSA-qualified health plan
• Medicare
• TRICARE

Exceptions – participating in the following plans will not disqualify you:

• Accident insurance
• Hospital indemnity insurance
• Dental insurance
• Vision insurance
• Long-term care insurance
• Workers compensation
• You cannot be claimed as a dependent on another person’s tax returns.

How do HSA contributions work?

Assuming you are eligible to contribute to an HSA (see IRS requirements above), anyone may contribute to your account. Common sources of funding include:

• Employer
• Payroll deductions you elect to have withheld from your paycheck
• Contributions you make directly to your account, for example transferring from a checking account into your HSA
• Family member

Regardless of the source of the funds, you receive the contributions into your HSA tax-free. Additionally, all funds deposited in your HSA are 100% vested from day one, meaning that you own the funds even if you change insurance plans, change jobs or stop working.

The IRS sets a limit to the amount of money that can be contributed to your HSA each year. This limit applies to all contributions made to your account, no matter the source. It is important for you to keep track of the contributions each year, and make sure you don’t go over the IRS limit to avoid tax penalties.

How do I pay expenses with my HSA?

Another unique benefit of HSAs is that there are no rules for how or when to use the money in the account. There are no claim filing deadlines and no use-it-or-lose-it rule like there are for other benefit accounts like HRAs and FSAs. The money is yours and remains with you, even through different plan years. This means that you can choose to reimburse expenses as they happen, or you can save expenses and then reimburse them later, for example take one large reimbursement.

The options available to you to pay eligible expenses from your HSA will depend on your HSA administrator. Common options include:

Debit Card. Using a debit card tied to your HSA is a convenient way to pay for qualified healthcare expenses at the point of sale. Just swipe your card to pay the provider, and the funds will be deducted from your HSA.

ATM. If you have paid out-of-pocket for an eligible expense and would like to reimburse yourself from your HSA, you may be able to withdraw cash from an ATM to pay yourself back.

Direct Deposit. Another option for paying yourself back for expenses you have already paid out-of-pocket is to use direct deposit. With this option, when you want to reimburse an expense, you can request to have the amount you paid transferred from your HSA to the bank account of your choice.

Online Bill Pay. To send a payment directly to a provider such as a doctor or dentist, you can request to have a payment made from your HSA and mailed directly to the provider.

There is no wrong way to reimburse your expense – just choose the option that works best for you for each expense you have!

What healthcare expenses are HSA eligible?

The IRS outlines the specific medical, dental, vision, and other expenses that qualify for HSA distributions in Publication 502, Medical and Dental Expenses. While common medical and dental expenses such as ambulance rides, bandages, dental treatment, eyeglasses and prescriptions are all specifically noted in Publication 502, you may be surprised to find that you can use your account to pay for many other qualified healthcare expenses as well.

HSA-eligible expenses can include but aren’t limited to:

• Capital expenses with the main purpose of making improvements to your home for medical reasons, such as installing ramps and railings, modifying doorways and hallways, moving electrical outlets or otherwise modifying your home in a way that makes it more accessible.
• Home care and nursing expenses, particularly relating to the care of an individual with a medical condition (such as providing medication or changing dressings).
• Lodging expenses, such as in the case where you need to pay for meals and lodging at a hospital or other medical facility.
• Addiction-related expenses, such as expenses relating to alcoholism or smoking cessation programs.
• Weight loss expenses, specifically when a physician diagnoses you with obesity, hypertension or heart disease and recommends you complete a weight-reduction program.
• Nonprescription and over-the-counter medications
• Feminine hygiene products
• Contacts and vision care
• And much more

For a user-friendly, searchable list of eligible expenses, visit the Associated Bank HSA Store and scroll down to the eligible expense list.

What are the pros and cons of using an HSA?

As with most tax-advantaged accounts, there are several pros and some cons that come with using an HSA.

Advantages of an HSA

There are many advantages to opening and contributing to an HSA that can make this an important piece in your financial plan.

Triple tax-advantage. HSAs are unique because they allow you to contribute money on a tax-free basis, earn money on your savings tax-free, and withdraw money tax-free (as long as you use the money to reimburse qualified expenses).

Generous contribution limits. The IRS determines the contribution limits that apply and adjusts them each year. You can see the current contribution limits here [insert link to page with limits]. While the contribution limits are lower than IRAs or 401(k)s, they’re still significant enough to build a hefty nest egg, provided you start early and save consistently.

100% vested immediately. Unlike some retirement savings accounts, money contributed to your HSA is 100% yours from day one, even if you change health insurance plans, change jobs or stop working. The account and the money in the account are yours forever, and you can decide when and how to use the funds.

Earning potential. Depending on the administrator you choose, you may be able to grow your account balance with earnings from interest and/or investments. As mentioned earlier, your money goes in tax-free and grows tax-free allowing you to accelerate your savings in an environment perfect for long-term growth.  

You decide how to use the money. There is no use-it-or-lose it rule like there is for other benefit accounts such as HRAs or FSAs. Also, there are no mandatory distributions like some other retirement accounts such as IRAs and 401(k)s. You decide how and when to use your money.

Disadvantages of an HSA

The primary disadvantage of an HSA is that not everyone can have one. As described above, people looking to enroll in an HSA and contribute to their account must meet all the requirements of the IRS.

The other disadvantage can be the high-deductible health plan (HDHP) itself. HDHPs trade lower premiums for higher deductibles, meaning that you will usually save money on the monthly cost for the insurance, but you may have to pay more in deductible expenses before the insurance begins to pay for some or all your healthcare costs.

The best way to offset this disadvantage is by opening and funding an HSA. This will allow you to save tax-free, earn tax-free and spend tax-free dollars to pay for your out-of-pocket healthcare costs.

Use an HDHP and an HSA to further your financial goals

High-deductible health plans (HDHPs) are an increasingly common way for Americans to save money on their healthcare costs. Often, they’re paired with a health savings account (HSA) to save for out-of-pocket healthcare expenses as well as further utilize the tax advantages and financial stability offered by an HSA.

High-deductible health plans come with four major benefits that make them appealing:

HDHPs come with lower monthly premiums, potentially saving you hundreds, if not thousands, of dollars per year in upfront costs.

These plans will usually pay for preventive care such as annual physicals, flu vaccinations and more, meaning many common medical expenses are covered without having to pay the deductible first

HDHPs will protect you from large medical bills if you or a covered family member gets seriously sick or hurt – once you pay the deductible, your plan will pay some or all the remaining expenses.

Your HDHP allows you to save money on a tax-free basis in an HSA to pay healthcare expenses for you and/or your family members.

By saving tax-free dollars in your HSA, you will be able to use those funds to pay for any expenses for yourself and your family members, including:

• Doctors visits
• Laboratory and testing
• Hospital
• Pharmacy
• Dental
• Vision

In fact, you can save money on many expenses you are paying today using tax-free money from your HSA. For a searchable list, check out The Complete HSA Eligibility List.

Combining your HDHP with an HSA gives you the best of both worlds – lower health insurance premiums plus tax-free savings to pay for healthcare expenses.

HSA frequently asked questions

Below, we’ll answer a few of the most commonly asked questions we receive about health savings accounts.

Note, however, that the rules and regulations surrounding HSAs are often nuanced, so it’s wise to speak with your HSA provider if you have specific questions about your account or options.

What’s the difference between an HSA and an FSA?

A health savings account (HSA) is a savings and investing account you personally own that you can use to pay for qualified medical expenses. The funds in the account can carry them over from year to year and from job to job. And, you can choose when and how to use the money.

A flexible spending account (FSA) is a spending account owned by your employer that you can use to pay for qualified medical expenses.

While you will still make contributions to the account (generally by selecting a savings amount during open enrollment), your employer will hold the funds in an account they control.

Also, FSA plans have deadlines by which you need to file claims in order to receive the money. Any unused money is forfeited. You can’t take the funds with you in subsequent plan years or when you change jobs.

Do the funds in my HSA expire every year?

No. Any funds you, your employer or anyone else contribute to your HSA are legally yours and won’t ever expire. They roll over indefinitely without penalty.

Because of the tax benefits offered by health savings accounts, many Americans choose to max out their HSAs each year, invest their funds and then carry those funds all the way to retirement as a way of protecting themselves from the high healthcare costs often in retirement.

This is a significant benefit over flexible spending accounts (FSAs), which generally expire at the end of the year unless your plan allows you to carryover a portion of your unused funds.

It’s important to understand the rules for each plan type you have so you can ensure you don’t miss out on any of your benefits.

Can I pay my insurance premiums with my HSA funds?

In general, no. In most situations, you can’t pay your insurance premiums using the funds in your HSA. This is because insurance premiums generally don’t count as a qualified medical expense, as noted by the IRS in Publication 502. However, there are a few exceptions.

The IRS notes that you can use funds from your HSA to pay for premiums that fall under the following categories:

• COBRA premiums and other healthcare continuation coverage.
• Medicare premiums for Medicare Part A (if you voluntarily enrolled), Medicare Part B (supplementary insurance) and Medicare Part D (for prescription drug insurance).
• Qualified long-term care premiums (up to an amount based on your age bracket).
• All health insurance premiums in the event you’re unemployed and receive federal or state unemployment benefits or qualifying continuation coverage (COBRA).

These exceptions have very specific requirements and parameters, so you should always speak with your HSA provider before using your account to pay for these expenses.

Can I help fund my retirement using an HSA?

Yes. In fact, financial advisors often advise people to max out their HSA contributions each year (provided they have the ability and budget to do so) as a way of getting a head start on retirement savings.

Recent estimates show that an average couple that retires at the age of 65 in 2022 will need around $315,000 to pay for health-related expenses in retirement.

Since healthcare makes up such a large portion of your expected expenses in retirement, an HSA can act as a tax-advantaged buffer between your healthcare expenses and your other retirement funds, helping stretch your other savings.

Further, by investing your funds, HSAs can help you take advantage of the effects of compounding growth to accelerate your savings goals, provided you start saving both early and often.

In fact, due to the effects of compounding returns, saving $7,750 every year for 30 years would result in an account worth $670,000.

And when you reach retirement at the age of 65, you can either withdraw these funds tax-free to pay for qualified healthcare expenses. You can also use the funds for any non-qualified expenses and pay income tax on the amount, but you will avoid the IRS penalty that would have applied before you reached age 65.

Find an HSA partner that puts your needs first

As we have discussed, HSAs present an excellent opportunity for individuals with high-deductible health plans to jumpstart their retirement savings while also protecting their immediate financial interests.

When considering whether to contribute to an HSA, it’s often wise to consider it as a part of your broader financial plan. It’s strongly recommended that you speak with a financial advisor who can help guide you to an HSA strategy that works for you.

You’ll also need an HSA administrator offering a wide array of features to help you maximize your account including: HSA investment selections and the ability to quickly and easily access your funds through an HSA debit card.

At Associated Bank, we can help you make sound financial decisions about your future by providing you with the information, tools and resources you need to improve and protect your financial health.

If you have any questions about the different requirements and rules surrounding HSAs, give us a call at 800-270-7719, schedule an appointment online or visit us at any of our Associated Bank locations.

We’d be happy to help you understand the pros and cons of this powerful account, as well as the many ways an HSA can help you work toward your financial goals.