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What is a Health Savings Account (HSA)?

An HSA is a tax-free savings account that’s paired with a high deductible health insurance plan to pay for routine medical expenses. Think of it as a 401(k) for health care.

How does an HSA work?

Each year, you decide how much to contribute to your HSA. The money in the account is put toward the deductible. Once the deductible is met, the insurance kicks in to cover any additional costs – just like a traditional insurance plan.

HSA account holders receive a debit card or checks connected to their HSA balance to pay for eligible medical expenses. Funds withdrawn for non-medical expenses before the age of 65 are subject to a penalty.

Any unused funds roll over from year-to-year and earn interest in the process.

With HSAs, the individual owns the account – not the employer, even if they contribute to it. That means you can take your HSA with you should you change jobs.

Do I Qualify for an HSA?

An employer may offer HSA-qualified insurance as an employee benefit. Others may select HSA-qualified plans from their state exchanges via the Affordable Care Act. You can also get an HSA through your financial institution.

You are eligible for an HSA as long as you do not have other disqualifying coverage, like a Flexible Spending Account (FSA), Medicare, Medicaid or Tricare. You also cannot be claimed as a dependent on another person’s tax return.

HSA Limits

The IRS sets the minimum deductible, maximum contribution and maximum out-of-pocket cost for HSAs each year.

  Minimum Deductible Maximum Contribution Maximum Out-Of-Pocket
Individual 2018 $1,350 $3,450 $6,650
​Individual 2019 ​$1,350 ​$3,500 ​$6,750
Family 2018 $2,700 $6,900 $13,300
​Family 2019 ​$2,700 ​$7,000 ​$13,500

*A catch-up contribution of $1,000 is allowed annually for people 55 or older.

HSA Tax Advantages

There are four tax advantages unique to HSA accounts:

  1. Contributions to HSAs are deductible to you, regardless of the source;
  2. Interest or investment gain on the account isn’t subject to tax;
  3. Funds can be withdrawn to pay for qualified medical expenses without being taxed; and
  4. After the age of 65, you can withdraw funds for non-medical expenses without being subject to a penalty (however, they will be subject to income tax).