HSA Rules and Coverage: Do You Really Need a Health Savings Account?

Maybe. For certain folks, the tax benefits and encouraged savings can be a boost for covering medical bills.

Benjamin Franklin supposedly said that the only certainties in life are death and taxes. But if he were alive in 2021, he probably would add health care expenses to that list.

According to the Centers for Medicare and Medicaid, health spending accounted for 17.7% of the US Gross Domestic Product in 2020. The average American spent more than $11,500 on health expenses in 2019. Of course, illnesses pop up unpredictably, which makes them hard to budget for. Not to mention, it can be hard to find out what medical treatment will cost before you need it.

But there's a tool in your arsenal, one that many experts say Americans overlook: the Health Savings Account (HSA).

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What is an HSA?

Functioning like an Individual Retirement Account (IRA), an HSA is a savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses in the future. The funds can be used to pay for bills that count toward your deductibles, copayments, coinsurance, and some other expenses (but generally not your health insurance premiums).

"The HSA is a big boon that is under the radar," Linda Grant-Smith, CFP, senior financial planner and vice president at Robert W. Baird & Co. in Nashville, tells Health.

How does an HSA work?

Grant-Smith explains that they "offer triple tax benefits." By that she means:

  1. You get a tax deduction when you put money in your account
  2. The earnings in your account grow tax-free
  3. The distribution—aka, the money you take out of your account—is not taxed, as long as you are reimbursing yourself for a qualified medical expense. (If you take money out of your HSA for non-medical expenses, you'll have to pay taxes and a 20% penalty on it. If you are over 65 or become disabled, you won't be assessed the penalty, but you will still pay taxes as if it is regular income.)

Who should get an HSA, and what can you use it for?

Not everyone is eligible for an HSA, and even if you are eligible, it may not be a good fit for you.

While you can use the money you've invested in your HSA at any time to pay for qualified medical expenses, you only can contribute to an HSA if you have a health insurance plan that is specified as a High Deductible Health Plan (HDHP).

In general, HDHP plans are health insurance plans (including those available on the federal marketplace) that only cover preventive services before the deductible. Your employer may also offer an HSA-eligible plan. In 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. (If you're searching for a plan in the Marketplace, you'll see them flagged as "HSA-eligible.")

If you have access to health insurance plans with lower deductibles, Eric Jans, an independent insurance agent in Nashville, suggests evaluating whether the HDHP route is best for you. It may make more sense for you to have a lower deductible and then set aside funds for health care in a savings account.

"You wouldn't get the tax savings," he tells Health, "but sometimes these plans are more expensive in the first place, and it's a wash."

What are HSA contribution limits and how much should you contribute?

If you opt for an HSA-eligible plan, you decide how much to contribute annually. The Internal Revenue Service sets the contribution limits for HSAs. In recent years, the yearly limits have been $3,600 for individuals and $7,200 for family coverage.

There's also an age limit involved with HSAs. If you're enrolled in Medicare, you can't continue making contributions to your HSA. But since medical expenses tend to increase with age, the plans have a provision that allows you to make up for lost time. As you approach retirement, between the ages of 55 and 65, you can contribute up to $1,000 over the yearly limits to help pay for medical costs in retirement.

When you're ready to pay your medical bills, you may have a debit card or checking account connected with your HSA, so you can pay the bills directly. You also can reimburse yourself for what you paid toward those bills.


To make an HSA work for you, you'll want to put the money aside for future medical expenses. The longer you have the funds invested in your account, the more time there is for the money to multiply. You can also roll over the entire amount of your HSA you haven't spent, so your medical nest egg grows. This is different from a Flexible Spending Account, or FSA, which generally has to be used by the end of the year. That said, if you put the money in your HSA account and then immediately spend it, you lose that added tax benefit, but you still pay your bills.

Of course, not all HSAs are created equal. But ratings of the different HSA providers are available to help you make decisions. Grant-Smith recommends the Morningstar report, which evaluates 11 different HSAs available to individuals. The report looks at the costs of each plan, assessing them both for current needs and as a tool for investment. Some health insurance companies offer HSAs for their HDHPs. Others are available through some banks and other financial institutions. Do your due diligence before you commit your dollars and your health care future to a particular plan.

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