About HSAs

What Is an HSA?

An HSA is a tax-advantaged savings account that receives uniquely generous tax treatment under the U.S. tax code.

All HSA contributions and withdrawals are tax-free, and so is the accumulated build-up inside the account. No other savings vehicle enjoys this level of freedom from the tax man.

An HSA helps your health care dollars go further—15 to 40 percent further, depending on your tax bracket.

And HSAs are the only savings vehicle that enables people to save tax-free for their health care costs in retirement.

Today more than 20 million Americans enjoy the benefits of this powerful savings tool.

Benefits of HSAs

HSAs promote patient sovereignty and reduce health care costs.

They also help patients save for the high cost of health care in retirement.

An HSA user can accumulate as much as $360,000 after contributing to an account for 40 years assuming a rate of return of just 2.5 percent, according to the Employee Benefit Research Institute. With a rate of return of 5 percent, an HSA user can accumulate $600,000 over 40 years.

History of HSAs

HSAs were created by Congress in 2004 to allow people to save for their health care needs with the same generous tax treatment enjoyed by employer-provided health insurance.

The concept was first authorized in 1996 in pilot form and then made permanent in late 2003.

Today there are more than 22 million HSAs benefitting an estimated 30 million Americans.

How HSAs Work

Anyone who is eligible to open an HSA may do so, but current federal rules effectively make only about 10 percent of Americans eligible.

Your HSA is held in trust for you by a bank or investment firm. You can invest the money however you like. You can keep it in an ordinary savings account, or in a money market account, or in an investment account with stocks, bonds, and the like. You can invest it in mutual funds.

Under current law, to be able to contribute to your HSA, you must also have a qualifying high-deductible health plan (HDHP). A “deductible” is the amount of money you must pay out-of-pocket before your insurance kicks in.

The money in your HSA can only be spent on legitimate medical expenses, as defined in the federal tax code. But non-medical withdrawals are heavily penalized: you must pay regular tax on the non-medical withdrawal, plus a 20 percent penalty.

There are also strict limits on how much you or your employer can contribute to your HSA on a pre-tax basis.

Finally, HSA-qualified health plans are required to include a maximum out-of-pocket limit, which is a special protection against excessive financial exposure. it’s a valuable form of catastrophic-expense protection not always found in other kinds of health insurance coverage (including, surprisingly, Medicare).

Although in recent years there has been a dramatic rise in the number of health insurance plans that feature a high deductible, not every high-deductible health plan qualifies for use with an HSA. The only plans that do qualify are ones that meet all of the requirements listed above.

But HSAs are not perfect. They need to be upgraded—turbocharged—to unleash their full potential.


More Information

Ways HSAs Could Be Improved