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How Health Savings Accounts Work

Meredith Miller Published: June 14, 2018 Updated: October 25, 2017

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For most, health insurance prices are a little too outrageous. Not only are you stuck paying costly health premiums, but you may get stuck with a high deductible and out-of-pocket costs as well. So what happens when a major medical expense comes up? Well, for many Americans it could mean financial ruins. For others who have health savings accounts (HSA), it could mean protection.

What exactly is an HSA?

It's a medical savings account used to pay for medical expenses, such as doctor or hospital bills or prescription medications. It typically can also be used for dental, vision and hearing expenses. You can deposit funds into the account pre-tax, which means less income to pay taxes on. Your employer may also contribute to your health savings account, and that can also be done pre-tax. Money deposited into the account can accrue interest, and if you don't use all the money in the account by the end of the year, the money left rolls over and can be used in following years.

How an HSA Works

You and/or your employer make your contributions to the account. When you have a qualified expense, such as an annual wellness exam, a prescription medication, or a dentist visit, the provider first bills your health insurance. If you have not met your deductible yet, insurance will not pay this bill. If you have met the deductible, then the insurance will pay the amount agreed upon. Whatever amount still needs to be paid, whether it's the full bill or a portion, the provider will then send you a bill.

You then use that bill to withdraw the funds from your account and pay the bill. HSA rules allow you to pay qualified expenses with no taxes, but if you are under age 65 and you withdraw funds for reasons other than a health-related expense, it will be taxed when you do so and you'll also need to pay a 10% penalty.

Are You Eligible?

The HSA rules are very specific about who is eligible for an account. You cannot be claimed as a dependent on someone else's tax return, first of all. Next, you must have an HSA-qualified health plan with no other health coverage. Other health coverage would include Medicare, Medicaid, military health coverage, a medical FSA (flexible spending account), or another health plan.

HSA Qualified Health Plans

An HSA-qualified health plan is a high-deductible health plan (HDHP). An HDHP is a health plan that has a higher deductible than typical health plans have. It also has a maximum limit on the total amount you'll pay for the annual deductible and out-of-pocket medical expenses for covered expenses. Out-of-pocket expenses include copayments and other amounts, but insurance premiums do not count as an out-of-pocket expense. The amounts can change, but in 2017, the minimum annual deductible to qualify was $1,300 for self-only coverage and $2,600 for family coverage. Annual out-of-pocket expenses can't exceed $6,550 for individuals or $13,100 for a family.

HSA Contribution Limits

There are HSA contribution limits. These HSA contribution limits vary depending on whether you are under or over the age of 55. Under the age of 55, you can contribute up to $3,400 for an individual or $6,750 for a family per year. For those over the age of 55, there is a catch-up contribution. This allows those over age 55 to contribute an extra $1,000 per year for both individuals and families.

Is a Health Savings Account for You?

Some people know they are eligible, but still, question whether or not they need to get one. There are many advantages to this kind of account. Aside from saving money for health expenses that can't be easily used for other purposes, you'll save money on taxes as well. Additionally, since the funds roll over from year to year if they're unused, you'll never lose money with this kind of account. If you set it up properly, after the age of 65, you can use it in retirement to help cover expenses in what's referred to as the "Medicare gap."

You can also use it for other expenses, penalty-free, after age 65, though you would still have to pay taxes on it. A health savings account is an incredibly useful tool for making the most of your money and ensuring your healthcare expenses are paid. It can also make you feel better about having a health plan with a higher deductible than you might initially feel comfortable with. You should keep it in mind as an option as you look over your options for health insurance plans.