Is an HSA Right for You?

Learn about this savings option.

An HSA, or Heath Savings Account, is a way to save money toward paying for medical expenses. You can contribute with pre-tax dollars, like you do for a 401(k), and the money goes with you from year to year and from job to job.

We address here the major elements of an HSA account, but you don’t need to be an expert to save money. First, contact your employer to ensure you have a qualifying High-Deductible Health Plan (HDHP), then call us or visit a branch to open your own HSA account.

Here are important things to know about HSAs.

What is a Health Savings Account (HSA)?

A Heath Savings Account (HSA) is a type of account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses and offset the costs associated with a High-Deductible Health Plan (HDHP). To be eligible, you must be enrolled in an HDHP.

An HSA is similar to a personal savings account, but the money can be used only for qualified healthcare expenses. It is not a substitute for health insurance; it is an optional savings source that supplements your health insurance plan. The cost of healthcare doesn’t change, but you can save and pay for it differently if you add an HSA.

The money you invest goes into the account before taxes. By using untaxed dollars in an HSA, you can offset some of the healthcare costs with savings and earn dividends while reducing reduce your income tax burden.

At CAP COM, the HSA comes in the form of a dedicated Checking Account, which allows you to use a debit card to make payments. The HSA account requires a separate membership account with its own account number. You can call (800) 634-2340 or visit a branch for assistance.

Carla Leto, CAP COM’s Account Support Administrator who recently completed an HSA Expert Certificate, is a proponent.

“I would encourage anyone who’s eligible to look into it,” Leto said. “You’re probably going to have to pay medical expenses anyway. You get pre-tax savings, and you pay for the medical expenses tax-free.”

What is an HDHP?

A High-Deductible Health Plan (HDHP) has a higher deductible than other insurance plans. It offers lower monthly premiums, which is why people are interested.

However, even if you have an HDHP, that doesn’t mean it qualifies for an HSA. There are a few things to consider because having a high deductible is not the only requirement for an HDHP to be HSA eligible. The IRS explanation about Publication 969 has all the details.

Leto recommends that you ask your health plan administrator, usually someone in human resources, to help you understand if your HDHP qualifies.

How much money can you contribute?

For 2021, if you have an HDHP, you can contribute up to $3,600 for self-only coverage and up to $7,200 for family coverage into an HSA. This amount is evaluated annually by the IRS and typically goes up slightly every year. If you’re age 55 or older, you can contribute an extra $1,000 through a “catch-up” contribution.

If your employer withdraws the money as a payroll deduction, it will be deposited into your HSA. Otherwise, you can contribute on your own to your HSA, which means you would deduct your contribution when you file your taxes with the IRS annually.

Can an employer contribute to an HSA?

Yes, employers can make contributions to their employees’ HSAs, and they can deduct the contributions on their business income tax return. The IRS has more details in the “Employer Participation” section of Publication 969.

Can an HSA earn dividends?

Yes, an HSA may earn dividends, which are not taxable, so your money can grow tax free.

Do HSA funds have to be spent every year?

Unspent HSA money rolls over year to year, making it available for future health expenses.

Note that eligible medical expenses can be purchased for yourself, your spouse, and your dependents (if you have them). At CAP COM, you can designate who can have an HSA debit card. This works well for college students who are away from home.

What happens to HSA money if you change jobs?

Your HSA money is portable, which means that the money in your HSA remains available to you for future qualified medical expenses even if you go to work for a different employer, change health insurance plans, or retire. Your HSA is your account, and you decide how and when to use the funds.

What can HSA money be used for?

HSA funds can be used to pay for deductibles, copayments, coinsurance, and some other expenses. Paying premiums with HSA funds is generally not permitted.

What are qualified medical expenses?

IRS Publication 502, Medical and Dental Expenses, defines medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”

There are dozens of examples, ranging from acupuncture to X-rays. Contact lenses and prescription drugs are on the list, too.

“We always direct members to the IRS website,” Leto said, “because that’s the most up to date.”

Is there a downside to an HSA?

First of all, you must be enrolled in an HDHP to be qualified to invest in an HSA. HDHPs are usually not ideal for people with chronic illnesses or expensive medications.

Second, if you withdraw funds for non-qualified expenses before you turn 65, you'll owe income tax on that money plus a 20% penalty. After age 65, you'll owe taxes but not the penalty.

Third, it’s the bookkeeping. You must keep receipts to prove that your withdrawals were used for qualified health expenses in case you are audited by the IRS.