Definition of an HSA

A health savings account, or HSA, is a valuable supplement to standard health insurance. High-deductible health plans associated with these savings accounts allow individuals or family members to pay lower insurance premiums while avoiding taxation on their medical expenses. The funds that accumulate in an HSA help people build up a nest egg for any medical or non-medical needs they may have after retirement.

Benefits

• Health savings accounts are a tax-free method of saving for medical care. Because the policies that work with these accounts require a relatively high deductible, they tend to have lower premiums than traditional insurance plans while possibly lowering the user’s tax liability, according to HSA Finder. HSAs have some similarity to another type of account called a flexible-spending account, according to Kiplinger. Flexible-spending account owners, however, must spend all the funds in the account by the end of each calendar year, while HSA owners can roll their funds over from year to year.

Uses

• A contributor to an HSA can use the account for any medical expenses, including many not usually covered by traditional health insurance. Funds not used can remain in the account as a hedge against future medical expenses or even as a form of retirement savings. HSAs remain with their owners even through changes of employment or location. Once the account owners turn 65, they can use their HSA for non-medical expenses without paying any interest or penalties on the money.

Rules

• Kiplinger states that a person who wishes to open a health savings account must first take out a health insurance policy eligible for use with HSAs. The individual deductible on this policy must also equal or exceed $1,150 per year. Individuals can contribute up to $3,000 per year to the account, while families can contribute up to $5,950 per year. These policies limit annual deductible and co-payment totals to $5,800 per individual and $11,600 per family.

Providers

• Several major health insurance offer individual and family policies intended for use with home savings accounts. Kiplinger notes that people can acquire these policies either on their own or through their employers (if the company benefits include an HSA-eligible option). In some cases, an employer will even pay a portion of the HSA funding or match employee contributions to the account.

Considerations

• While health savings accounts offer many conveniences, account holders should keep in mind that certain withdrawal limitations apply. For instance, HSA owners under the age of 65 who decide to use some of the funds for non-medical reasons, such as vacations or home remodeling, pay a penalty of 10 percent of the amount withdrawn. They will also have to pay income tax on the non-medical withdrawals.