The ABCs of HSA FAQs - How Do HSAs Work and Do You Meet the HSA Requirements?

A Health Savings Account, or HSA is a special account with tax advantages for putting money aside to pay for qualifying medical costs. Like all accounts that have tax benefits, HSAs have certain Internal Revenue Service (IRS) requirements and rules. Once you understand how an HSA works, you can decide if it is the right choice for you.

How Do You Open an HSA?

You must meet certain legal requirements to open an HSA. First, you must have what is called a high-deductible health plan (HDHP). For 2022, this means your plan must have a deductible of at least $1,400 for an individual or $2,800 for a family. Also, your annual out-of-pocket expenses (including deductibles, copayments, and coinsurance) cannot be more than $7,050 for an individual or $14,100 for a family. (This limit does not apply to out-of-network services.)¹

How Do You Open an HSA?

Unlike an FSA (Flexible Spending Account) or an HRA (Health Reimbursement Account) which must be opened and managed by your employer, you can open an HSA yourself, either through your health insurance company or at a bank or financial institution that offers them. HSAs may also be offered by employers to employees, and may be funded by the employer, the employee, or a combination of the two. Often companies offer funding in an HSA as part of the benefits it offers employees.

How Can I Save Money With an HSA?

An HSA lowers your tax burden because it is funded with your gross, pre-tax earnings. Pre-tax contributions lower your taxable income by every dollar you put in. For example, if you make an annual salary of $50,000 and fund your HSA with the family annual maximum of $7,000, you only must pay taxes on $43,000 for that year.

What Are the Main Advantages of an HSA?

An HSA is unique in several ways. First, it is the only kind of medical expense account that offers a triple tax savings advantage. It is also the only kind you can grow and draw from at any time — even years after you spend on qualifying expenses. Key benefits of an HSA include:

• No income limits for opening one
• No deadline to use the funds. You can reimburse yourself at any time, even decades after you paid for qualifying expenses
• Portability — you can take an HSA with you from employer to employer and keep it if you leave the workforce or retire
• A triple-tax advantage:
  • It lowers your taxable income because it is funded with pre-tax contributions
  • Interest on any growth is tax-deferred
  • Withdrawals are tax-free when used for qualifying expenses

Where Can I Open an HSA?

You may be able to open one through your employer's health plan or can do it through a bank or financial institution that offers them. Or you can research HSAs online, HSA Search (www.hsasearch.com) is one tool to find an HSA.

Is There an Annual Limit on What I Can Put In an HSA?

Yes. For 2022, you can contribute up to $3,650 to an HSA if you have single coverage or up to $7,300 for family coverage. And if you are 55 or older anytime in 2022, you can contribute an extra $1,000. The IRS can change the limits each year.²

How Do I Withdraw Money from My HSA?

Some HSAs have a debit card to pay for expenses directly and others come with checks you can use to reimburse yourself for expenses.

Do I Have to Use the Money In My HSA By The End of The Year?

No, with an HSA you have the flexibility to roll the money over year after year and reimburse yourself for qualifying expenses whenever you want.

What Happens to My HSA After Retirement?

You can let the money in your HSA grow through interest or investments similar to a 401K or IRA account and reimburse yourself at any time — even after you retire. Because of this feature, an HSA is also known as a “sleeper retirement account." For example, let's say over the years you contribute $70,000 to your HSA and the money grows to $100,000 through interest and investments (your HSA bank will likely offer investment options). You can withdraw the $100,000 tax-free (if you've kept receipts and records to show you've spent that much on qualifying expenses).

Do I Ever Have to Pay Taxes on the Money I Withdraw from My HSA?

Only if you use it for non-qualifying expenses. The beauty of an HSA is, if used for eligible expenses, it offers a triple tax-free advantage: The money going in lowers your taxable income, it grows tax-free (you don't have to pay taxes on any interest or gains), and you don't have to pay taxes on what you take out as long as you use it for qualifying medical expenses.

What Happens if I Use My HSA for Non-qualified Expenses?

If you withdraw from your HSA before age 65 for non-qualified expenses, you will be taxed at your regular tax rate and get hit with a 20% penalty. If you withdraw from it for non-qualifying expenses after the age of 65 or if you become disabled, you will be taxed at your regular rate but will avoid a penalty.

What Are HSA-Eligible or Qualified Expenses?

Some common HSA-qualifying expenses include³:

• Acupuncture
• Ambulance service
• Bandages
• Birth control treatment
• Breast pumps and lactation supplies
• Contact lenses and solutions
• Drug prescriptions
• Eyeglasses (Rx and reading)
• Fertility enhancement
• Infertility treatments
• Hearing aids and batteries
• Laboratory fees
• Mental health services
• Over-the-counter medicines
• Personal protective equipment (PPE) such as masks and hand sanitizer
• Stop-smoking programs and products (such as nicotine gum or patches if prescribed)
• Surgery (excluding cosmetic)
• X-Rays
• Vasectomy
• Walker, cane
• Wheelchair

Please note that the IRS can modify its list at any time. For a full list of HSA-qualified medical expenses, go to www.irs.gov or consult with a tax advisor.

What Expenses Do Not Qualify for an HSA

HSA non-qualifying medical expenses include³:

• Aromatherapy
• Baby bottles and cups
• Breast enhancement
• Cosmetics
• Hair re-growth supplies or services
• Veterinary Fees
• Childcare

Please note that the IRS can modify its list at any time. For a full list of HSA-qualified medical expenses, go to www.irs.gov or consult with a tax advisor.

Are There Any Drawbacks to Opening an HSA?

With an HSA it pays to be an organized, meticulous keeper of receipts and records — and costs you if you are not. To avoid paying taxes on the funds, you must prove you spent the money on qualifying expenses. When deciding whether to open an HSA, consider whether you are committed to managing the necessary paperwork. If not, you probably will not be able to enjoy the full benefits of an HSA.

How Do I Know if an HSA Is Right for Me?

First, make sure your health plan qualifies as an HDHP. Then consider how much you spend each year on HSA-qualifying expenses and be honest with yourself about whether you are up to the task of managing the necessary paperwork and record-keeping. If used properly and maximized for growth, an HSA can be an excellent way to gain tax advantages while paying for healthcare expenses.

Managing Healthcare Costs with CareCredit

If you are looking for an option to help manage your medical bills, consider healthcare financing with the CareCredit credit card. The CareCredit card can help you pay for the care you want and need and make payments easy to manage.* Apply today and use our Acceptance Locator to find a provider near you that accepts CareCredit. Continue your wellness journey by downloading the CareCredit Mobile App to manage your account, find a provider on the go, and easily access the Well U hub for more great articles, podcasts, and videos.

Our Expert Reviewer

Patty Caballero and her team of consultants together have more than 35 years of health insurance knowledge working for some of the biggest health insurance companies in the US. She has knowledge in building brands and strategic initiatives to help consumers better understand their health benefits.