Health insurance is a $453 billion industry in the US, with total industry expenditures exceeding $4.8 trillion. America spends more on healthcare than any other developed country, and with decidedly mixed results as its return on investment. Healthcare insurance presents a range of challenges for everyday households seeking coverage. One increasingly popular insurance option is a Health Savings Account (HSA). 

Learn more about Health Savings Accounts, the items eligible for HSA spending, and how to determine if an HSA is a smart choice for you or your family. 

What Is a Health Savings Account?

A Health Savings Account is a medical savings account that allows you to set aside pre-tax income to save for qualifying medical expenses. 

To open an HSA, individuals must be enrolled in a high-deductible health plan (HDHP). The HDHP must have a minimum deductible of $1,650 self-only coverage or $3,300 for family coverage. The plan’s maximum out-of-pocket costs cannot exceed $8,300 or $16,600 for a family plan. 

Additionally, the policyholder cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return for that year. 

How Do Health Savings Plans Work?

HSAs are often said to offer a “triple tax advantage”. That is to say, the three biggest benefits of an HSA are related to tax advantages. 

  1. Tax-deductible contributions: The money you add to your HSA is tax-deductible (if you add it directly) or pre-tax (if added through your employer’s payroll). Both scenarios lower your taxable income. 
  2. Tax-free growth: Money in your TSA grows tax-free. Interest, dividends, or other gains are not subject to federal income tax. 
  3. Tax-free withdrawals: When you withdraw funds to pay for HSA-qualifying items, you do not pay any tax. 

There is a 20% HSA withdrawal penalty if you withdraw funds to your bank account or use HSA money for non-qualifying medical expenses. 

What Does a Health Savings Account Cover?

You can pay for most qualified medical expenses with your HSA. The exact items covered by an HSA may vary slightly from year to year, but the following list is generally fixed. 

HSA-eligible Items

  • Deductibles, co-payments, and co-insurance
  • Prescription drugs
  • Doctor and hospital visits
  • Surgeries
  • Dental and vision care (including contact lenses, glasses, braces, etc.) 
  • Most over-the-counter medications
  • Crutches and other medical equipment
  • Hearing aids
  • Long-term care services

Importantly, you can use your HSA funds to pay for qualified medical expenses for your spouse and kids, even if they aren’t on your HDHP plan. 

You can view the full list of HSA-eligible items here. 

Long-term Investment with HSAs

Some individuals choose HSAs as a long-term investment strategy, rather than a savings vehicle for medical care specifically. Once your HSA reaches $1,000-$2,000 (depending on your plan), you can invest those funds in stocks, ETFs, and other financial investments. Once you turn 65, you can convert your HSA into a 401(k) or IRA, which provides a second source of retirement income. It’s important to note that even if you choose to invest with your HSA, you won’t face taxes or penalties when using funds for qualified medical expenses.

Related: The True Cost of Healthcare

Is A Health Savings Plan Right For Me?

For some individuals, an HDHP plan with an HSA offers significant advantages over other types of coverage. HSAs may be a smart decision if:

  • You are in good health and don’t have recurring or expensive medical expenses
  • You have sufficient savings already. Since HDHP plans have high deductibles, you’ll need to cover the pre-deductible costs if an unexpected medical event occurs.
  • You want (and will use) the triple tax advantages of the plan. 
  • You want portable medical funds, even when you change policies or employers.

HSAs may not be a good option for you if:

  • You have recurring and/or expensive medical costs. 
  • You don’t have the savings to cover pre-deductible expenses.
  • You’re enrolled in Medicare or a non-qualifying healthcare plan.
  • You don’t plan on contributing to your HSA on a regular basis.

Discuss with your employer the possibility of matching HSA contributions, and consider consulting a financial advisor to determine the best option for you. 

Decoding Healthcare with Less Cancer

Education is a crucial component in addressing health disparities in the US. We offer programming and resources for healthcare professionals, as well as informed content for the general public. Access to healthcare and a thorough understanding of healthcare insurance and related issues make a difference – you can, too. 

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