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Health Savings Account (HSA)

What is an HSA?

A Health Savings Account (HSA) is a special tax-sheltered savings account. It functions similar to a traditional IRA, but you use it for medical expenses – especially before age 65. HSA’s differ from FSA’s and HRA’s. Below is a brief introduction from our friends at Humana.


Consider your HSA as an account (the container) in which you deposit money that you’ll use to pay for your non-covered medical expenses. Any funds that you deposit into your HSA become tax-deferred because they are 100% tax-deductible at the time of deposit. Before age 65, you must use the money only for qualified medical expenses, or pay taxes and a 10% penalty. After age 65, the money can be spent any way you choose, penalty free – but you’ll still pay taxes.

Your money is not lost if you don’t use it year-to-year. It’s yours to keep forever. Plus you can invest it within the HSA account in available instruments any way you see fit. Some people will use an HSA for additional tax-deferred savings, choosing to pay for medical expenses out of pocket while letting the HSA account grow like an IRA. See a qualified financial professional for assistance and tax or investment advice.

An HSA is only available when you also have a qualified, “high-deductible” health insurance plan. Your insurance plan will pay covered expenses in excess of the deductible amount (per plan), and you pay the “typical” bills (co-pays, other fees, per plan, up to your deductible) with pre-tax money from the HSA**. You can even use these pre-tax dollars to pay for medical expenses not covered under the insurance policy, like vision, dental and alternative medicine. What you don’t use is yours to keep and grow toward future medical bills, or your own retirement, similar to an IRA.

** You can’t pay your health insurance premiums with HSA funds unless you are collecting Federal or State unemployment benefits, or you have COBRA continuation coverage through a former employer.

What is required in order to open an HSA?

Before you can open and make tax-deductible contributions to an HSA, you must first be insured under a qualified high deductible major medical insurance policy. The rules are set by the federal government and plans must meet certain qualifications.

Once the qualifying high deductible health insurance policy is issued and in effect, you are then eligible to establish and make contributions to your own HSA savings account. The account must be established and maintained by a bona fide HSA custodian, which simply means a financial institution that has been approved by the IRS as an HSA administrator. Many local banks and investment firms offer HSA accounts, or contact us for help in finding a source.