Health Savings Account (HSA) Discussion

A Health Savings Account (HSA) is an account that you can put money into to save for future medical expenses. Contributions to the account receive favorable tax treatment.

In order to have an HSA, you must have a "high deductible health plan." For 2016 that is a deductible of at least $1,300 for single coverage or at least $2,600 for family coverage. Also, the 2016 annual out-of-pocket expenses under the plan cannot exceed $6,550 for single or $13,100 for family. You cannot be on Medicare and you cannot be claimed as a dependent on someone else's tax return.

What are the advantages of an HSA?

Affordability - A higher deductible reduces your health insurance premiums
Flexibility - You can use your HSA funds for current medical expenses or let them grow for future needs
Savings - You can use the HSA to save money for future medical needs and invest and grow the funds within the account in any manner you like
Control - You make all the decisions about how much money to put into the account, where the account is held, what to invest the funds in for growth, and which medical expenses to pay from the account
Portability - You keep your HSA if you change jobs, change health insurance, become unemployed, move to another state, or change your marital status
Ownership - Funds remain in the account until you take them out; there are no "use it or lose it" rules
Tax Savings - (1) Your contributions to the HSA (up to the allowable limits) are tax deductible; (2) Interest or investment earnings on the funds in your HSA are tax free; (3) Amounts you withdraw to pay for "qualified medical expenses" do not create a taxable event (withdrawals for other purposes are taxed as income and a 20% penalty is applied - the penalty no longer applies at age 65) Note: The penalty was 10% until it was raised to 20% for 2011 and beyond.

"Qualified Medical Expenses" include much more than just your insurance deductibles. They include most medical care and services as well as dental care, vision care, prescription drugs and insulin. They also include medical expenses for your spouse and dependent children even if they are not covered by your health insurance plan.

Note: Over-the-counter drugs also used to be considered "qualified medical expenses", but with the passing of the "Affordable Care Act" in 2010, effective January 1, 2011, you must have a prescription for over-the-counter drugs for them to qualify.

For more information, see IRS Publication 969.

Note: We're still not exactly sure how the Affordable Care Act will affect HSAs. Hopefully, there won't be much effect as HSAs are one of the better things Congress has come up with in a long time.


Find an HSA plan that's right for you on