When given the option of enrolling in an HSA-compatible health plan, the first question most people ask is, What is an HSA?

Well, the government says that if you have a specific type of health insurance plan, then you can set up a savings account to pay for eligible expenses with tax-free dollars. The type of health plan is called a high-deductible health plan, and the savings account is called a health savings account, or HSA.

Contribution Limits

With an HSA, you’re allowed to contribute up to $4,300 in tax-free money to your account if you have single coverage, and up to $8,550 if you have family coverage. That’s a plan covering you and at least one other person.

If you’re over the age of 55, you can also contribute an additional $1,000 per year in catch-up contributions.

Flexibility in Contributions

HSAs are very flexible. For instance, you’re allowed to make contributions all the way up until the tax filing deadline, April 15th of most years, in equal installments or one lump sum, however you would like.

You do not have to have a crystal ball like you have to have with other types of accounts. You don’t have to know at the beginning of the year how much you’ll spend on medical expenses. Instead, you just need to make sure your account is established and that you can contribute the funds after you have incurred a claim.

Use-It-or-Keep-It

An HSA is not a use-it-or-lose-it account like a flexible spending account is. Instead, it is a use-it-or-keep-it account. Unused funds roll over from year to year, and they tend to grow over time as you continue to make additional deposits, and your account earns tax-free interest or investment income.

Portability and Ownership

An employee owns the account permanently. An HSA is portable, which means that you take it with you when you leave a job. You also have the option of using those HSA funds at the point of service or paying with after-tax dollars and then reimbursing yourself from your HSA at a later date, even in future years.

Budgeting for Medical Expenses

With an HSA, you get a tax break when you make the deposit to the account, and it allows you to budget for future medical expenses. Think of it as a rainy-day fund.

The Triple-Tax Benefit

An HSA is the only account out there with a triple-tax benefit:

  • You get a tax break when you put the money into the account.

  • The funds grow on a tax-free basis over time.

  • As long as you withdraw your HSA funds for qualified medical expenses, they’re always tax-free.

A 401(k) or an IRA grows tax-free. However, you do pay a tax whenever you take the money out. With an HSA, there is no tax.