What is an HSA? Qualifications, Contributions, Uses, and More

Editor’s note: An earlier, and shorter version of this blog post was previously published. We published this update to provide a more comprehensive response to “What is an HSA?” This new blog outlines the rules and uses of account ownership, and more.

It’s a fact. The cost to be - and stay - healthy rises each year. And even the comprehensive (expensive) health insurance plans are covering less for the cost of care. So what’s a person to do? Open an HSA.

A Health Savings Account (HSA) allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. You, your employer, and even friends and family can contribute money to your HSA. The contributions are tax-deductible and never expire. So you can save them for a rainy day, retirement, or to help pay for an expensive procedure you have coming up.

How Do I Qualify for an HSA?

To qualify for opening and contributing to an HSA, you must meet these criteria:

1. You must enroll in a High-Deductible Health Plan (HDHP). In 2020, the IRS defined HDHPs as any plan with a deductible of at least $1,400 for an individual and $2,800 for a family. The total annual out-of-pocket expenses can’t exceed $6,900 for an individual or $13,800 for a family.
2. You can’t have any other supplemental health insurance coverage. Meaning, you can’t be covered under your spouse’s health insurance plan too.
3. You must not be eligible for or enrolled in Medicare.
4. You must be under the age of 65.
5. You can’t contribute to a Health Flexible Spending Account (HFSA). But you can contribute to a Dependent Care (DCFSA) or Limited-Purpose FSA (LPFSA) and contribute to a health savings account in the same year.

How Does a Health Savings Account Work?

Step 1: Elect a high-deductible health plan during open enrollment.

Step 2: Open a health savings account and decide how much you want to contribute.

To enroll in an employer-sponsored health savings account, you'll likely open your HSA during open enrollment. Let your employer know how much you want to contribute for the year (up to the IRS contribution limit). And your employer will begin making payroll deductions each month.

Your employer may choose to contribute to your HSA. But they’re not required to. If they do, those contributions will count toward your annual limit. But will remain tax-free to you.

Maybe your employer doesn’t offer a health savings account. Or it’s outside of open enrollment and you want to get started on saving for your health care costs today. You can open an HSA with a financial institution in the private market.

With this route, you will make arrangements to fund your HSA with the account administrator. And your contributions will be deducted from your gross taxable income when you pay taxes for that year.

Step 3: Use your funds for qualified medical expenses.

To use your funds, your account administrator may provide a debit card so you can pay for your health care costs at the point of sale. Or you will pay for costs upfront and submit documentation for reimbursement. Your withdrawals are tax-free as long as you use the money to pay for qualified medical expenses. If you use your money for something else, the money you withdrew will be subject to income tax plus a 20% penalty.

Additional health savings account details:

• You own your account so you can take it with you from employer-to-employer (or employer to unemployed).
• Even if you choose a health insurance plan that isn’t an HDHP, you can still use past contributions for out-of-pocket, qualified medical expenses. But you won’t be able to contribute to your account.
• Employer contributions are tax-free.
• If you’re under the age of 65, you must use your contributions for qualified medical expenses.
• Once you reach 65, you can no longer contribute to your account. But you can use your savings to pay for whatever you’d like.
• An HSA offers triple tax savings: pre-tax or tax-deductible contributions, tax-free interest and investment earnings, and tax-free distributions when used for qualified medical expenses.

How Much Can I Contribute to My HSA?

Contribution limits are set annually by the Internal Revenue Service.

For 2020, those limits are:

• $3,550 for someone with an individual health plan.
• $7,100 for a family health plan.
• An additional $1,000 “catch-up” if one or both members of the family are aged 55 or older.

For 2021, those limits are:

• $3,600 for someone with an individual health plan.
• $7,200 for a family health plan.
• An additional $1,000 “catch-up” if one or both members of the family are aged 55 or older.

What Can I Use a Health Savings Account For?

HSA-eligible expenses include (but are not limited to):

• Deductibles
• Copays
• Coinsurance
• Out-of-pocket costs related to diagnostic services like x-rays and blood tests
• Prescriptions
• Quality of life enhancers like air purifiers (with a letter of medical need)
• Medical supplies like band-aids and crutches
• Alternative medicine treatments like acupuncture

This list is not exhaustive. For a comprehensive list of IRS-qualified medical expenses check “What’s Eligible."

What Happens to My HSA if I Switch Employers?

You get to keep your account and every dollar you’ve saved. Although you may not be able to continue contributing to that same account.

If your new employer uses a different health savings account administrator, you will have two options. Roll the HSA from your previous employer into the new account or maintain two different HSAs. One account from your previous employer - from which you can withdraw but not contribute. And one from your current employer into which you can start contributing.

For more details about your specific situation, contact your HR department.

Where Can I Sign-Up for an HSA?

You can sign up for an HSA in two places. Through your employer, if it offers this benefit. Or through a financial institution in the private market.

Here, at Lively, we offer a private-market HSA that allows you to put your contributions into mutual funds or other investments. That way you can access an even greater benefit: growing your money with the market.

As you can see, there are many ways an HSA can help you save money for health care expenses and retirement. A health savings account can also offer security should you lose your health insurance coverage for a period of time. For more information about HSAs, check out our HSA Guide.