What Is a Health Savings Account?

When asked to make decisions about HSA, FSA, HRA, HDHP and other benefit-related acronyms all at once, the information overload can stir up more questions than any FAQs page can answer. But, when looked at separately, each of these isn't so hard to manage, particularly the HSA, or health savings account.


Health Savings Account (HSA)

An HSA is a true savings account. You contribute money to it through a regular payroll deduction or direct payment, and it remains yours. It is a health savings account because it is intended to help you save for health care costs and dental expenses.

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You don't lose the remaining HSA funds at the end of the year. The HSA is still yours next year. Even if you change jobs, the account is yours, and you can continue to contribute to it.


An HSA can be a death benefit too. If your beneficiary is your spouse, the HSA may transfer to them. If the beneficiary is not your spouse, the cash value will be released and taxed after any qualifying medical expenses related to your health care have been paid.

It can be challenging to predict and budget for your annual health care expenses, but what you don't use this year, you can still use next year, unlike the funds set aside in a flexible spending account (FSA).


How an HSA Works

To qualify for an HSA, you must have a high-deductible health plan (HDHP), as defined by the IRS. For 2022, the minimum deductible for an HDHP is ​$1,400 for an individua​l and ​$2,800 for a family​, with an out-of-pocket maximum of $7,050 and $14,100, respectively.

If your health care plan is an HDHP, you qualify for an HSA. If the HSA is offered by your employer, you may receive an employer contribution when you sign up for the account.


Most employers offer this option. If yours doesn't, you can open and contribute to your own HSA. All you need is an HDHP and a bank, insurance company or other trustee.

Tax Advantages of an HSA

One of the most significant benefits of an HSA is that your contributions to the account are pretax. If you make the median household income of ​$79,900,​ you will save over 20 percent on those contributions by not paying them out of your net earnings.


The money you spend or take out is tax-free, as long as it is used for qualified expenses. If you earn interest or dividends on HSA funds, those are also tax-free. Any employer contributions to your HSA are not considered taxable income, so they aren't taxed either.

However, if you make withdrawals from your HSA funds for non-HSA-eligible purposes, expect a 20 percent penalty. At tax time, you'll report all contributions to your HSA on tax Form 8889.

Consider also​: How to Claim the Federal Tax Deduction for an HSA Contribution


Qualified HSA Expenses

To avoid penalties, you need to know what is an HSA-eligible expense and whose health care expenses are covered.

Consider also​: Can My Wife Use My HSA?

Qualified medical expenses are services, treatments or products for yourself, your spouse or your eligible dependents that the IRS has deemed eligible for payment with HSA funds. Most items directly related to health care qualify:


  • copays
  • insurance premiums
  • ​hospital services
  • vision care
  • dental expenses
  • medical aids and supplies
  • prescription drugs

With the Coronavirus Aid, Relief and Economic Security Act (CARES), eligible expenses were expanded to include telehealth and over-the-counter medications. These are just a few of the many health care categories covered. Check IRS.gov or ask your account provider to confirm eligibility.

Consider also​: What Is an HSA Distribution?


HSA Contribution Limits

The IRS imposes a limit on how much pretax money you can stow away in your HSA. Some may consider this a drawback. In 2022, these limits will be ​$3,650​ for individual coverage and ​$7,300​ for family coverage. If your employer makes contributions to your account, that counts toward your maximum.

If you exceed the contribution limits in a plan year, the excess amount will be included in your gross income and taxed. You must report this on Form 5329, and you may be charged a ​6 percent​ excise tax on the overpayment amount. HSA accountholders age ​55​ or older can use catch-up contributions to tack on an additional ​$1,000​ to their HSA funds in 2022.


It can be challenging to predict and budget for your annual health care expenses, but what you don't use this year, you can still use next year, unlike the funds set aside in a flexible spending account (FSA).

Consider Also​: Can You Change Your HSA Contribution Mid-Year?