Understanding HSAs and How They Can Benefit You

Introduction to Health Savings Accounts (HSAs)

In today's complex healthcare environment, a health savings account, or HSA, have become an important tool for managing health care costs. But what exactly is an HSA?

Simply put, a health savings account is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that these plans do not cover. They were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act and signed into law by President George W. Bush on December 8, 2003.

HSAs have gained popularity due to their triple tax advantage. Contributions are tax-deductible, the interest earned is tax-free, and withdrawals for eligible medical expenses are also tax-free. Now, let's dive deeper to understand how HSAs work.

William Bevins CFP CTFA is a Nashville Financial advisor and Franklin TN Fiduciary. For a free consultation, including information for employer-sponsored plans, click here.

How Health Savings Accounts Work

An HSA works in conjunction with your high-deductible health plan. Your HSA accumulates funds, provided by you, your employer, or both, in a similar manner to a savings account. However, the crucial difference is that the funds in your HSA are intended to pay for qualifying healthcare expenses.

Here’s a hypothetical example: Suppose you’ve opted into an HSA through your employer. Each month, a pre-determined amount of your pre-tax income (established by you) is deposited into your HSA. When you need to pay for a qualifying healthcare expense, you can withdraw funds from this account. If you don't use all of the funds within a given year, no worries—the funds roll over year to year, providing a means to save for future healthcare expenses or even retirement.

Health Savings Account Requirements

HSAs sound great, but it's essential to know that there are some eligibility requirements. To qualify for an HSA, you must

  • Be covered under a high deductible health plan (HDHP) on the first day of the month.

  • Have no other health coverage except what is permitted under "Other health coverage".

  • Not be enrolled in Medicare.

  • Not be claimed as a dependent on someone else's tax return.

These requirements ensure that HSAs are utilized by individuals who truly need them—those with high-deductible health plans.

Types of Health Savings Accounts

When it comes to HSAs, you might wonder if there's more than one type. While the basic structure of HSAs remains consistent, they can vary based on who provides the account—your employer or a financial institution.

  • Employer-Sponsored HSAs
    Many employers offer HSAs as part of their benefits package. In these instances, the HSA may be paired with an employer's specific high-deductible health plan. These HSAs often include the added benefit of employer contributions. The employer may match your contributions up to a certain amount, thereby helping you accumulate savings more quickly.

  • Individual HSAs
    If your employer doesn't offer an HSA, or if you're self-employed, you can open an HSA with various financial institutions. These HSAs function similarly to employer-sponsored accounts, but without the benefit of employer contributions.

Allowable Contributions to HSAs

The Internal Revenue Service (IRS) sets the limits for how much can be contributed to an HSA each year. For 2023, the maximum contribution limit for an individual is $3,650, and for a family, it's $7,300. If you are 55 or older by the end of the tax year, you can make an additional "catch-up" contribution of $1,000.

Contributions can come from various sources, including you, your employer, a relative, or anyone else who wants to contribute to your HSA. However, all contributions combined must not exceed the annual limit.

When are Withdrawals Allowed

Understand Your Options for Paying Medical Expenses

Understanding HSA Withdrawals

One of the main benefits of a Health Savings Account (HSA) is the ability to use the funds to pay for a wide range of healthcare expenses, often referred to as "qualified medical expenses". The withdrawals from an HSA for these qualified expenses are tax-free, which means you don't have to pay any taxes on this money.

The Internal Revenue Service (IRS) has defined qualified medical expenses as costs for diagnosis, cure, mitigation, treatment, or prevention of disease and for treatments affecting any part or function of the body. It also includes amounts paid for transportation primarily for and essential to these medical care services.

Examples of qualified medical expenses that you can pay for using HSA funds include

  • Prescription medications

  • Over-the-counter medications (with a prescription)

  • Doctor's office visits and physical exams

  • Dental care (excluding cosmetic procedures)

  • Eye exams, glasses, and contact lenses

  • Laboratory tests and X-rays

  • Hospital services and surgeries

  • Psychiatric and certain psychological treatments

  • Long-term care services

  • Medical equipment like crutches, bandages, and wheelchairs

However, there are some expenses that are not considered qualified medical expenses, and if you use your HSA funds to pay for these, you may be subject to taxes and penalties. These non-qualified expenses might include:

  • Over-the-counter medications without a prescription

  • Cosmetic procedures

  • Gym memberships (unless it's specifically recommended by a doctor for a specific medical condition)

  • Health insurance premiums (with a few exceptions)

  • Medical expenses that have been reimbursed or are reimbursable through insurance or other sources

It's crucial to understand these distinctions to avoid potential tax penalties and to get the maximum benefit from your HSA.

Pros and Cons of Health Savings Accounts

Like any financial tool, HSAs have both advantages and disadvantages.


  • Triple Tax Advantage
    As mentioned earlier, contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible medical costs are tax-free.

  • Roll Over Balance
    The funds in an HSA roll over from year to year. You don’t lose the money if you don’t spend it within the year.

  • Portability
    If you change jobs or leave the workforce, the HSA stays with you, similar to how a 401(k) would.

  • Retirement Savings
    After age 65, you can withdraw funds for any reason without penalty, though if not used for medical expenses, the withdrawal may be taxable.


  • High Deductible Requirement
    To qualify for an HSA, you must have a high-deductible health plan, meaning you'll pay more out-of-pocket before your insurance starts covering costs.

  • Potential for Misuse
    If funds are used for non-qualified expenses before age 65, you’ll pay income tax on the withdrawal plus a 20% penalty.

  • Requires Active Management
    Like other savings accounts, an HSA requires active management to ensure that you don't exceed contribution limits and that funds are being used properly.

Comparing HSAs and FSAs

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both designed to help individuals save for healthcare costs on a pre-tax basis, but they have several key differences.

  • Ownership and Portability
    An HSA is owned by you, the individual. This means you can take it with you if you change employers or leave the workforce. On the other hand, an FSA is owned by your employer, and typically, you can't take it with you if you change jobs.

  • Eligibility Requirements
    To contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). In contrast, you don't need to be enrolled in any specific type of health plan to contribute to an FSA..

  • Roll Over of Funds
    In an HSA, funds roll over from year to year, meaning you won't lose your savings if you don't spend them within a year. With an FSA, it's typically a "use-it-or-lose-it" situation. Any funds not used by the end of the plan year are forfeited, although some employers may offer a grace period or allow a small amount to roll over.

  • Contribution Limits
    As of 2023, you can contribute up to $3,650 per year to an HSA as an individual or up to $7,300 as a family. For FSAs, the contribution limit is $2,850 per year, regardless of individual or family status.

  • Withdrawals
    Both HSAs and FSAs allow tax-free withdrawals for qualified medical expenses, but as mentioned above, HSAs have some restrictions and penalties for non-qualified expenses. FSAs also restrict non-qualified withdrawals, and inappropriate use may result in the entire FSA balance becoming taxable.

Are Health Savings Accounts Right for You?

Whether an HSA is right for you depends on various factors. If you’re a generally healthy individual or family who doesn’t frequently visit the doctor or take regular medications, the high-deductible requirement of an HSA might make sense for you.

An HSA might also be a smart choice if you're looking for ways to lower your taxable income since contributions are made pre-tax. Moreover, if your employer offers contribution matching, an HSA can be an excellent way to save for future health care costs or retirement.

However, if you're someone who regularly needs medical care or doesn't feel comfortable with a high-deductible health plan, an HSA may not be the best choice.

Summing Things Up

Health savings accounts are an innovative tool for managing healthcare costs, providing a triple tax advantage, and even helping save for retirement. They come with specific requirements, have pros and cons, and are not for everyone. Still, with a thorough understanding and strategic management, they can be an integral part of your financial and health plan.

It's essential to review your personal situation, healthcare needs, and financial goals when considering an HSA. As always, consult with a financial advisor or health insurance expert to help you make the best decision based on your individual circumstances.

The world of healthcare can be complex, but with tools like HSAs, you're one step closer to navigating it with confidence.


About William Bevins CFP® CTFA

William Bevins has spent a career in finance, investing, and advice. Today, William serves as a fiduciary advisor offering clients of all economic backgrounds help with investing, wealth creation, retirement planning, and more. Reach William at his email address - [email protected] or visit his website WilliamBevins.com.