What you need to know about HSAs (health savings accounts)

Healthcare is complicated — but it’s a part of life. And unfortunately, it can get expensive if you have to rely on it. (See just how expensive a hospital bill can be here.)

Fortunately, there’s a financial tool that can help you reduce your healthcare costs and help you save for retirement — at the same time. We’d like to introduce you to the health savings account, also known as an HSA. You might have heard of it by now, but if you haven’t, trust us: it’s not a super-secret account reserved for Wall Street. You can open one, too! Keep reading — we’ll show you how (and why you should).

What is a health savings account?

A health savings account is a special savings account used to pay and save for your healthcare expenses. Think of it like your recommended 3-6 month emergency fund, but specifically for your medical care.

HSAs are tax-advantaged accounts. This means you can put money in your account tax-free, and if you spend that money on an IRS-qualified medical expense (see the list below), you don’t have to pay taxes on that either. Oh, and if your account reaches a certain amount, it can start to earn interest — and that grows tax-free, too. The money you have in your HSA is yours forever, too. It’s a win-win-win!

There are some limits to how much you can contribute each year to your HSA, though. In 2022, individuals can contribute a maximum of $3,650, and families can contribute $7,300. If you’re 55 and older, you can contribute $1,000 more — also known as a “catch-up contribution.”

Plus, after you turn 65, your HSA acts like a traditional IRA (Individual Retirement Account). This means that you can take out that money to pay for anything you’d like — but you’ll have to pay taxes on it when you do, just like a traditional IRA. But don’t worry: you can still use the account to pay for medical expenses tax-free.

If all these tax savings have you begging the question, “Where do I sign up?”, there’s one last important detail you need to be aware of. In order to qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP).

High-deductible health plans and health savings accounts

High-deductible health plans are like a PPO (preferred provider organization) plan, but with higher deductibles (and a lower monthly premium). Because you might have a higher deductible, those costs can be paid using your HSA. In 2022, an HDHP must have a minimum annual deductible of $1,400 for individual coverage, and $2,800 for family coverage. This amount is what you will pay for your healthcare needs before your insurance begins to pay (this is called coinsurance). On the flip side, HDHPs have a maximum out-of-pocket of $7,050 for individual coverage, and $14,100 for family coverage in 2022. This is the most you’ll pay for medical costs in a calendar year before your insurance begins to cover 100% of the costs.

Also, keep in mind that if you can say yes to either of the following, you unfortunately do not qualify for an HSA:

You are a dependent on another person’s tax return.
You or your spouse are covered by Medicare.

High-deductible health plans are an excellent choice for people who are healthy and don’t visit the doctor too often (outside of the recommended preventive visits, which are usually $0 when you visit an in-network provider!). All while being able to save money for any medical expenses that come up now and in the future.

What can you spend your HSA money on?

We’re glad you finally asked. While this isn’t an exhaustive list (and approved expenses could vary by plan), here are some of the most common IRS-qualified medical expenses you can use your HSA dollars on.* We think you’ll be surprised at just how versatile this account really is!

Acupuncture
Ambulance
Artificial limbs
Blood sugar test kits for diabetics
Chiropractor
Crutches
Dental treatments, including x-rays, cleanings, fillings, sealants, braces, and tooth removal
Doctor visits and co-pays
Drug prescriptions
Eyeglasses (Rx and reading)
Feminine hygiene products
Fertility treatments
Flu shots
Insulin
Laboratory fees
Medical alert bracelet
Midwife
Over-the-counter medicines and drugs (like allergy and sinus medicine, cold and flu medicine, pain relievers, and ointments for cuts, burns, or rashes)
Personal protective equipment (PPE), like masks and hand sanitizers
Speech therapy
Surgery (excluding cosmetic surgery)

Plus, some eligible dependent care expenses include:

Au pair services
Babysitting services
Before- and after-school programs
Custodial or eldercare expenses, either in-home or at a daycare center
Nursery school
Pre-kindergarten
Summer day camp (for programs not educational in nature)

Health savings account alternatives

So let’s say you have a PPO plan with your employer and you’d prefer not to look into other options, but you want some of the benefits of an HSA. You can do one of two things:

1. Look into an FSA (flexible spending account).

An FSA is slightly different and usually found with more traditional employer-based insurance plans. It’s a special account you can put money into that you can use to pay for healthcare costs — all the same ones listed above! The biggest differences between an FSA and an HSA are that with an FSA, you must spend everything you put into your account within the calendar year. And that the account must be set up and managed by your employer. (So if you leave your job, your remaining funds might be forfeited. Talk to your HR representative about your options if that’s your situation!)

2. Set up a designated medical savings account with your community financial institution.

If you’re uninsured or just prefer to keep a close eye on your finances, opening a savings account with your community financial institution just for health-related costs could be a consideration. This way, you can separate your medical savings from any other general savings you may have. (Tip: make sure it’s a savings account that you can easily transfer money to and from in case of an emergency, and not a CD [certificate of deposit] or brokerage account.)

No matter which alternative option you choose, having a separate account for medical expenses — and the ability to contribute tax-free, if you can — can be a big help when it comes to saving and budgeting for your healthcare.

*https://www.hsabank.com/hsabank/learning-center/irs-qualified-medical-expenses