Health Savings Account (HSA)
Plain English
A health savings account is a savings account for medical costs that comes with tax breaks. You can put money in only if you have an HSA-eligible, high-deductible health plan. You can use the money for your deductible, copays and other qualified medical expenses, and what you don't spend stays in the account for later years.
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Definition
A health savings account (HSA) is a tax-advantaged savings account used to pay for qualified medical expenses. Contributions can generally be made only by people enrolled in an HSA-eligible high deductible health plan (HDHP). Funds can pay deductibles, copayments, coinsurance and other qualified expenses, generally not premiums, and the account's interest or other earnings aren't taxable.
Why It Matters
An HSA can soften a high-deductible plan's biggest drawback. Money set aside before tax can pay the deductible, and unused money carries over. But you have to be in an eligible plan to contribute, and spending HSA money on things that aren't qualified medical expenses can mean taxes and penalties.
Real-World Example
Imagine someone chooses an HSA-eligible plan with a lower premium and a higher deductible. Each month they put part of their savings on premiums into the HSA. In a year they need an MRI and physical therapy, they pay the deductible from the HSA with pre-tax money. In a healthy year, the balance rolls over and keeps growing.
Common Misconceptions
- Anyone can open an HSA. You can contribute only with an HSA-eligible plan.
- HSA money must be spent by year-end. That's a flexible spending account (FSA) rule; HSA balances carry over.
- An HSA can pay your health insurance premiums. HSA funds generally may not be used for premiums.
Key Takeaways
- HealthCare.gov: an HSA lets you "set aside money on a pre-tax basis to pay for qualified medical expenses."
- You may contribute only if you have an HSA-eligible plan, sometimes called a high deductible health plan (HDHP).
- Funds generally may not be used to pay premiums.
- IRS Publication 969 has the yearly contribution limits and rules.
Frequently Asked Questions
What is an HSA?
A tax-advantaged savings account for qualified medical expenses, open to people with an HSA-eligible high-deductible health plan.
Who can contribute to an HSA?
Generally only people enrolled in an HSA-eligible health plan. IRS Publication 969 explains the other eligibility rules.
Can I use my HSA to pay premiums?
Generally not. HealthCare.gov says HSA funds generally may not be used to pay premiums.
What's the difference between an HSA and an FSA?
An HSA requires an eligible plan and its balance carries over from year to year. An FSA is usually through an employer, and unused money may be lost after the plan year, depending on the plan.
Can I use an HSA for dental and vision?
Many dental and vision costs are qualified medical expenses. IRS Publication 502 lists what qualifies.
Related Terms
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- Health Insurance
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Explore the rest of the Health Insurance category.
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The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.
- healthcare.govHealth Savings Account (HSA) - Glossary · HealthCare.gov (U.S. Centers for Medicare & Medicaid Services)
- irs.govPublication 969, Health Savings Accounts and Other Tax-Favored Health Plans · Internal Revenue Service (IRS)
- irs.govPublication 502, Medical and Dental Expenses · Internal Revenue Service (IRS)
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