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What is an HSA account?

Ever wondered what an HSA was and how it works? Find out here.
By: Vivian Xia
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Health Savings Accounts, or HSAs, are tax-advantaged accounts for people under high-deductible health plans (HDHPs) so they can save money for qualified medical expenses and reduce their taxable income. To qualify for an HSA, you need to fulfill the eligibility requirements established by the Internal Revenue Service in that you need to have a qualified HDHP, have no other health coverage, not be enrolled in Medicare and not be claimed as a dependent on someone else’s tax return.


You can only contribute to an HSA with cash; the yearly limit for deposits for 2020 is $3,550 for self-only HDHP coverage and $7,100 for family HDHP coverage. Amounts are adjusted every year for inflation, and the contribution limit is increased by $1,000 for individuals age 55 or older at the end of their tax year. An HSA owned by an employee can be funded by both the employee and the employer, and any other person, including family members and those who are self-employed or unemployed, can also contribute to an HSA. Contributions made by an employer to an HSA are included in the contribution limits listed above.

Contributions made to an HSA do not have to be used or withdrawn during the tax year, and any leftover contributions can be rolled over to the next year. Additionally, if an employee changes jobs, they can still keep their HSA. An HSA can also be transferred to a surviving spouse tax-free in the event of an account holder’s death. However, HSAs have specific rules regarding withdrawals, along with a recordkeeping requirement that may be burdensome to keep up.


Withdrawals will not be taxes as long as they are used to pay for qualified medical expenses not covered under the HDHP. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments and other qualified medical expenses not covered by a health insurance plan.

Insurance premiums usually don’t count toward qualified medical expenses unless the premiums are for Medicare or other healthcare coverage for those who are age 65 or older, for healthcare insurance while you are unemployed and receiving unemployment benefits, and for long-term care insurance.

However, if you break the rules regarding withdrawals and use the money toward anything other than medical expenses, the amount withdrawn will be subject to income tax and an additional 20% tax penalty. If you’re age 65 or older, you will no longer be able to contribute to an HSA, though you will still be able to withdraw funds from the account for any expense without having to face the 20% penalty. In this case, income tax will still apply to non-medical usage.

Pros and cons of an HSA account

There are many advantages and disadvantages of an HSA. Here are some of the advantages:

  • Many expenses qualify, including a wide range of medical, dental and mental health-related expenses
  • Though there is a contribution limit, anyone can contribute to your HSA
  • Tax advantages:
    • Money is usually contributed to an HSA using pre-tax income, lowering a taxpayer’s total taxable income, which means lower taxes; this applies for federal income taxes and most state income taxes
    • If you make contributions using after-tax income, you can deduct them from your gross income on your tax return and lower your taxes
    • Contributions made to an HSA are 100% tax-deductible
    • Withdrawals from an HSA are not subject to federal and most state taxes, assuming they are used for qualified medical expenses
    • Any interest earned in an HSA is tax-free
  • As mentioned earlier, money left over in an HSA at the end of the year rolls over to the next year
  • It is also mentioned earlier that you can keep your HSA for future qualified medical expenses if you change health insurance, switch jobs, die or retire
  • HSAs are convenient in that most issue a debit card, allowing you to pay for eligible medical expenses right away

Here are some of the disadvantages of an HSA:

  • To qualify for an HSA, you need to have an HDHP, which can be a financial burden in that the deductibles for medical procedures can be expensive
  • HSAs may pressure you to not seek healthcare in order to avoid spending money in your HSA account
  • As mentioned earlier, if you withdraw money for non-qualified expenses before you turn 65, the money is subject to taxes, and you will be subject to a 20% penalty on top of that
    • After you turn 65, you will still owe the taxes but not the penalty
  • Excess contributions made to an HSA are subject to a 6% tax and are not tax-deductible
  • As mentioned earlier, HSAs have a recordkeeping requirement, which means you need to keep receipts to prove that your withdrawals were used for qualified health expenses
  • Some HSAs charge extra fees such as a monthly maintenance fee or a per-transaction fee; this varies across institutions


An HSA account is like a personal savings account for people with high-deductible health plans to use toward qualified medical expenses. Anyone can contribute money to your HSA, and the money carries over between tax years, jobs, health insurance plans, etc. The main advantages of an HSA is that it allows those with HDHPs to save money for qualified medical expenses while also reducing their taxable income. However, HSAs require you to have an HDHP, which can be a financial burden because the deductibles for costly medical procedures can be very expensive. When deciding whether you should get an HSA, you should take into account all factors and your situation. For example, if you already have an HDHP, it may be a good idea to get one, but if you don’t already qualify, you may want to think again about whether it is worth getting an HDHP so you can have an HSA.

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