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A Guide to Health Savings Account Rules

These tax-free savings accounts can help you pay for out-of-pocket health care costs, but an HSA is not the right choice for everyone.

Written by Erin Gobler / April 5, 2022

Quick Bites

  • A health savings account—or HSA—is a tax-advantaged account that helps you pay for your medical expenses.
  • You can contribute to an HSA only if you have a high-deductible health insurance plan.
  • In 2022, you can contribute up to $3,650 to an HSA with an individual health insurance plan, or $7,300 with a family plan.
  • An HSA offers triple tax advantages: tax-free contributions, tax-free growth and tax-free distributions as long as you spend the money on qualified medical expenses.
  • An HSA is a powerful savings tool, but choosing a high-deductible health plan may not make sense financially for some.

As out-of-pocket health care costs continue to rise—and insurance plans push more costs onto consumers—ways to lessen the burden are gaining in popularity, too. That includes a tax-advantaged savings tool that was created nearly 20 years ago to help Americans set aside money for the medical expenses that insurance doesn’t cover: the health savings account, or HSA.[1]

The tax benefits of an HSA are significant. You can deduct contributions from your income, the money in the account grows tax-free and your withdrawals to pay for qualified medical expenses are tax-free, too. The only twist is that to fund an HSA you must have a high-deductible health insurance plan (HDHP).[2]

Here’s what you need to know about the rules for contributing to an HSA and spending the money in the account.

Inside this article

  1. The tax benefits of an HSA
  2. HSA rules
  3. HSA vs. FSA
  4. Pros and cons of HSAs
  5. Should you use an HSA?

The tax benefits of an HSA

A health saving account offers tax perks that you can’t find elsewhere. “An HSA is triple tax-advantaged, allowing an individual to save pre-tax dollars, invest the money within the account, and not pay taxes on potential investment gains, or when using the money for qualifying medical expenses,” says Alissa Krasner Maizes, an investment advisor and the founder of the Florida financial planning firm Amplify My Wealth.

These are the three key tax benefits:

1. Tax-free contributions

You contribute to an HSA with pre-tax dollars. If your employer deducts your contributions from your paycheck, that will happen before income taxes are taken out. If you contribute directly to an HSA, you’ll be able to deduct your contribution on your tax return. All in all, this can mean handsome upfront savings. In the 22% tax bracket, for example, making the maximum $7,300 contribution to your family’s HSA will save you $1,606 in federal income taxes.

2. Tax-free growth

The money in your HSA doesn’t necessarily have to just sit in a savings account doing nothing. You can invest those funds in stocks and bonds and aim for growth over time. And just like in a tax-advantaged retirement account, the investment gains, dividends and interest you earn in your HSA are entirely tax-free.

Tip: Because HSAs let you invest the funds and enjoy tax-free growth, you can treat this as a long-term investment account, just like any other tax-advantaged retirement account, instead of a short-term health care spending account.

3. Tax-free withdrawals

Finally, you can withdraw funds from your HSA tax-free as long as you spend the money on qualified medical expenses (see what qualifies in the next section). If you spend the funds in your HSA on anything else, you’ll owe taxes on those withdrawals, as well as a 20% tax penalty if you’re under the age of 65. Once you turn 65, your HSA can essentially serve as another retirement account. You can still withdraw money from your HSA for qualified medical expenses tax- and penalty-free. And if you withdraw money for any other reason, you won’t face a penalty, though you will have to pay income taxes on the distribution.[3]

“The triple tax-advantaged benefits of an HSA are tremendous, especially when using it as a retirement health savings vehicle, allowing individuals to fund their HSA and invest it, paying for current health-related expenses with other money,” says Maizes.

HSA rules

An HSA can be a valuable tool to help you save for medical expenses, but before you sign up for this plan, be sure you understand the rules and restrictions.

Eligibility

Any account that offers such powerful tax benefits is sure to limit admission, and the HSA is no exception: The only people who can sign up for an HSA are those who have a high-deductible health plan (HDHP). The term “high-deductible” isn’t subjective—the government sets specific limits. In 2022, an individual health plan must have a deductible of at least $1,400 per person to qualify for an HSA; for a family plan, the threshold is $2,800.[2]

The good news is that other than the deductible, there are no other rules for what makes a health plan HSA-eligible. Employer-sponsored plans, private plans and plans purchased on the marketplace can all be paired with an HSA. In fact, when you sign up for health insurance, the fact that the plan is HSA-eligible will probably be included right in the description.

Tip: The high-deductible rule only dictates who can contribute to an HSA. If you no longer have an HDHP, you can still make tax-free withdrawals from your HSA to pay for qualified medical expenses.

Contributions

Just as there are restrictions on who can fund an HSA, there are also limits on how much you can put in every year. In 2022, you can contribute up to $3,650 with an individual health insurance plan and up to $7,300 per year with a family plan. If you are 55 or older, you can make an additional $1,000 catch-up contribution per year.[2] Again, these contributions are with pre-tax money, meaning they reduce your taxable income—and your tax bill.

Another benefit of the HSA is that your balance never expires. Instead, unused funds roll over from one year to the next. You could use the money you contribute to your HSA in your 20s and 30s to pay for health care costs in your 60s and 70s.

In addition, some employers contribute to their employees’ HSAs, similar to 401(k) plan matching contributions. Keep in mind that contributions from your employer will count toward the IRS contribution limit.

Withdrawals

As long as you spend the money in your HSA on qualified medical expenses incurred by you or any family member or dependent, you won’t pay taxes or penalties on the withdrawal.

The definition of qualified medical expenses is broad, covering out-of-pocket costs like spending to meet your deductible, copayments and coinsurance for doctor visits, tests, prescription drugs, inpatient stays and even many over-the-counter purchases. And those can be expenses from previous years as well as the current one. You may be able to use the funds to pay for COBRA, Medicare and long-term care insurance premiums. You can’t, however, use HSA funds to pay health insurance premiums.[2]

Some notable inclusions that you may not have thought of are[4]:

  • Birth control

  • Blood sugar test kits

  • Breast pumps

  • Chiropractor

  • Contact lenses and eyeglasses

  • Crutches

  • Dental treatment

  • Face masks

  • Feminine hygiene products

  • First aid supplies

  • Hearing aids

  • Laser eye surgery

  • Medical alert bracelets

  • Over-the-counter medications

  • Physical therapy

  • Smoking cessation programs

  • Special education services

  • Wheelchairs

Items that do not qualify as an HSA-approved expense include[5, 6]:

  • Adoption fees

  • Aromatherapy

  • Baby oil

  • Baby wipes

  • Cosmetic surgery (except for breast reconstruction following a mastectomy for cancer)

  • Cosmetics

  • Cotton swabs

  • Dental floss

  • Deodorant

  • Health foods

  • Gym membership

  • Mouthwash

  • Skincare

  • Toothpaste

HSA vs. FSA: What’s the difference?

A flexible spending account (FSA) is another type of tax-advantaged account that you can use to pay for health care expenses. Just like HSA contributions, the money you put into your FSA is pre-tax and can be withdrawn tax-free to pay for qualified health care expenses.

Beyond that, there are a few critical differences, starting with who is eligible. With an FSA, you don’t need a certain type of health insurance plan to qualify, but your company must offer the account as an employee benefit. To contribute to an HSA, you must have an HDHP, and while your employer may offer an HSA, you can open your own HSA if your employer doesn’t.

Contribution limits are lower with an FSA: a max of $2,850 in 2022, and this contribution limit is per employer rather than per person, so having a family health plan doesn’t allow you to contribute more.

The final key difference is what happens to your contributions. While the money in your HSA rolls over from year to year, with an FSA it’s typically use-it-or-lose-it. Your employer can provide a 2.5-month grace period to spend the money or allow you to roll over up to $570 (in 2022), but they don’t have to.[7]

Pros and cons of HSAs

Given the rising costs of health care and the prevalence of high-deductible health plans, HSAs are attracting more interest. But if you’re considering an HSA, it’s important to look at both the pros and cons.

Pros of an HSA

  • Triple tax-advantaged, thanks to the tax-free contributions, tax-free growth and tax-free distributions

  • High contribution limit of $3,650 per individual or $7,300 per family in 2022

  • Funds roll over from year to year

  • You can keep your HSA even if you switch jobs or no longer have an HDHP

  • You can invest your HSA for long-term growth

  • Funds can be used for any purpose after age 65

Cons of an HSA

  • Only available with high-deductible health plans

  • You’ll owe taxes and penalties on distributions before age 65 that aren’t for qualified medical expenses

  • You must keep records to show the IRS that you used your withdrawals for qualified expenses

Should you use an HSA?

An HSA can be an excellent tool to help you save money on health care. But that doesn’t mean it’s worth choosing an HDHP solely so you can use an HSA. HDHPs often have much lower premiums, and that savings, along with the tax savings of the HSA, might make up for the higher deductible. But in other cases, those benefits simply won’t outweigh the higher out-of-pocket costs.

“Although I love the triple tax advantages of an HSA, especially for those that choose to designate it as a vehicle to save for retirement health-related expenses, it needs to align with an individual's needs and budget,” says Maizes. “When considering health care insurance coverage, never overlook whether the premium and potential out-of-pocket deductible amount align with your budget and that your doctors are part of the specific plan.”

Tip: If you’re comparing health plans and aren’t sure if the HDHP will be more cost-effective, try an online comparison calculator. You punch in the numbers of your premiums, deductibles and more, and the calculator will tell you which plan makes more financial sense. Your employer might also offer a tool during open enrollment. HSA providers like HealthEquity and WageWorks also offer comparison calculators.
Article Sources
  1. “Health Savings Accounts (HSAs),” U.S. Department of the Treasury, https://www.treasury.gov/resource-center/faqs/taxes/pages/health-savings-accounts.aspx.
  2. “Health Savings Account (HSA),” HealthCare.gov, https://www.healthcare.gov/glossary/health-savings-account-hsa.
  3. “Publication 969: Health Savings Accounts and Other Tax-Favored Plans,” IRS, https://www.irs.gov/pub/irs-pdf/p969.pdf.
  4. “Publication 502: Medical and Dental Expenses,” IRS, https://www.irs.gov/pub/irs-pdf/p502.pdf.
  5. “Qualified Medical Expenses (QME),” HealthEquity, https://healthequity.com/qme.
  6. “HSA, HRA, Healthcare FSA and Dependent Care Eligibility List,” HSABank, https://www.hsabank.com/hsabank/learning-center/irs-qualified-medical-expenses.
  7. “Using a Flexible Spending Account (FSA),” HealthCare.gov, https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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