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Summary: A health savings account (HSA) pairs with a high deductible health plan and helps you save money for qualified medical expenses.
Health Savings Account (HSA)
A health savings account or HSA is a tax-favored savings account used to save money for healthcare costs. When you pay into an HSA, your contributions are not taxed, and you can also earn interest on these funds, which is also not taxed. These accounts are offered by banks, credit unions, and insurance companies around the US. However, only individuals enrolled in high deductible health plans (HDHPs) are allowed to open them. The purpose of these accounts is to help individuals have the savings ready to pay for their deductible payments, copayments, and other medical expenses that might not be covered by their insurance.
How does it work?
An HSA is a type of trust that you set up with a trustee. That trustee can be a registered bank, credit union, insurance company, or another institution or person approved by the IRS. When you open an HSA, you’re allowed to make contributions to it every year until you turn 65 and enrol in Medicare. Most often, HSA owners pay contributions to their HSA with every pay cycle if their account is opened and maintained by their employer.
For the 2024 tax year, you can contribute a maximum of $4150 if you have individual coverage. If you have a family health plan, however, you can contribute as much as $8300. If you didn’t reach your contribution limit in the previous year, you can also add a catch-up contribution of $1000 this year.
All of the funds in your HSA are yours and no one else’s. You can carry over all of these funds from year to year until you need to use them. When you do, they must be for qualified medical expenses only, but these disbursements can be for you or any family member who is your dependent. The disbursements are tax-free, and you can also earn tax-free interest and investment income from the funds in your HSA.
Who can contribute?
The beauty of an HSA is that anyone can contribute to this type of account. According to the IRS, contributions can come from the account owner, but any other person can also make contributions, such as an employer or family member. Any contributions to the HSA, except those made by an employer, are deductible on the account owner’s tax return.
There is a clear benefit to putting money in a HAS. It acts as a tax shelter for your own funds or the funds of others. Because contributions can be deducted from tax returns, they’re considered untaxed. You can even deduct the contributions from your employer from your gross income, which means that while you can’t fully deduct employer contributions, they can still lower your overall tax burden.
How to open a health savings account
If you want to open a HAS, you need to first determine your eligibility. Individuals are eligible to open these accounts if they meet the following requirements:
- They are covered by a high-deductible health plan.
- They don’t have other health coverage (except coverage for worker’s compensation, a specific disease, hospitalization at a fixed daily rate, accidents, disability, dental, vision, long-term care, or telehealth).
- They aren’t enrolled in Medicare.
- They can’t be claimed as a dependent on another person’s tax return.
It’s important to understand that a high-deductible health plan is simply any health insurance plan that has a high enough deductible and out-of-pocket expense maximum that meets the IRS’s definition of an HDHP. While you might not change plans from year to year, the IRS’s definition can change. Therefore, it’s important to check with your employer or your private plan’s details to find out if it is considered an HDHP.
If you find that you’re eligible, you can look for an HSA provider that offers what you need. You may or may not need to pay a fee to open your account or for account maintenance, so be sure you understand the fee structure before opening an account.
It’s also possible for your employer, if you have one, to open a health savings account on your behalf. This can come as a benefit of your job and will normally be stated in your employment contract, especially if your employer offers a group plan for an HDHP. Even if your employer opens the HSA on your behalf and pays contributions into it, you are always the account owner. Even if you change jobs, the account and the funds in it always belong to you.
Health savings accounts improve financial security
If you’re on a high-deductible health plan, you may struggle to pay copayments and that high deductible when you need medical attention. Having money in a dedicated trust can give you padding when you need to pay for qualified medical expenses. HSA contributions are untaxed to help support health care and this means they make for a good place to save your money for the medical expenses you’ll one day incur.
FAQ
No, you don’t need to be employed. No employer sponsorship is necessary for an HSA, however you do need to assess your eligibility to open one. You need to be actively enrolled in a high-deductible health plan, and this should be your only source of health insurance coverage (with a few exceptions). You can’t be on Medicare, Medicaid, or your spouse’s medical insurance plan.
Yes, as long as a person is a dependent on your tax return, you can use your HSA to pay for their qualified medical expenses. Even if your child is claimed as a dependent on their other parent’s tax return (in the case of divorce), you can still use your disbursements to pay for their expenses without them being taxed.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
