HSA

What is a HSA?

A health savings account (HSA) is a tax-exempt savings account for medical expenses available to those with a high-deductible health plan. The funds contributed to a HSA are not subject to federal income taxes. Your savings may only be used for qualified medical expenses. Otherwise, you’ll get taxed for the amount you spend as ordinary income as well as a 20% penalty—that’s $20 for using $100 on an unqualified expense.

Who qualifies for a HSA?

You may contribute to a HSA if you meet all of the following:

• You are covered under a high-deductible health plan on the first of the month that you’re planning to make contributions.
• You have no other health coverage (excludes additional coverage that you might have for accidents, disabilities, dental care, vision care, long-term care, a specific disease or illness, a fixed amount per day of hospitalization, liabilities covered under workers’ compensation or some other insurance)
• You are not enrolled in Medicare
• You cannot be claimed as a dependent on someone else’s tax return

What are the benefits of a HSA?

There are several tax advantages to investing in a HSA. First, your contributions are tax exempt and you can contribute pre-tax income to your HSA or get a tax deduction for your contributions. Secondly, all your earnings are tax-free. If you invest your HSA and earn some returns, then you do not have to pay any taxes on the earnings. Lastly, when you withdraw your money or use it on medical expenses, you do not have to pay taxes on your withdrawals. Some additional advantages of a HSA are mentioned below when compared to a flexible spending arrangement (FSA).

HSA vs FSA

A HSA and a FSA are similar in that they both are tax-exempt; you may make pre-tax contributions to a HSA or FSA. They are both also used for medical expenses. Here are their differences:

• A FSA is an employer-established benefit, so is only available through an employer and not available if you’re self-employed. You may, however, open a HSA on your own.
• You must decide at the beginning of the year how much you want to contribute towards your FSA, whereas for a HSA you may contribute however much you’d like under the contribution limit. If you switch jobs or have a change in your marital status or dependents, then you may change your FSA contribution amount.
• For 2020, the contribution limit per FSA is $2,750. For a HSA, the limit is $3,550 for individuals and $7,100 for families. If you’re 55 years old or older, you may contribute an additional $1,000.
• The savings in a FSA are not portable once you leave an employer. That means if you don’t use your contribution to your FSA, you’ll forfeit the money. HSA contributions are portable from employer to employer or even if you’re not employed.
• You lose any unused amount in a FSA at the end of the year, but HSA savings don’t expire.

Choosing a HSA

Ready to open a HSA? We’ve reviewed a number of HSA providers. Scroll to the top to see the reviews.