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Health Savings Accounts 101 (HSA)


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An HSA is a tax-exempt account to help fund the deductible portion of a health insurance policy with a high deductible. HSAs provide the following four tax breaks.

  • There is no income tax on your contribution.
  • An employer can make a contribution which is not counted as income.
  • The money in an HSA grows tax-deferred so no tax is payable while the money remains in the account.
  • The funds can be withdrawn tax-free if they are used for qualified medical purposes.

Contrary to conventional wisdom, HSAs work for people with a serious health condition or history.

HSAs can be used by people under age 65 who are self employed people or who are employees of any size employer. An employer can make a contribution which is not counted as income. You can withdraw from the HSA tax-free for medical expenses at any age

 In order to be eligible to take advantage of an HSA:

  • You must be under age 65 and not have Medicare.
  • Your health plan
    • You must have a High Deductible Health Plan (HDHP) In 2021, the health insurance deductible must be at least $1,400 for individual coverage or $2,800 for family coverage 
    • The policy must make everything subject to the same deductible (other than preventive care which must be covered by all health plans without any deductible or cost sharing). For example, policies with a separate deductible for medications are not acceptable.
    • The policy must limit out-of-pocket costs to $7,000 for people with individual coverage and $14,000 for family health plans.
  • You do not have any other health plan that is not an HDHP.
  • To learn more, see: Eligibility Requirements To Establish An HSA

You, the employee, own and control the HSA. Contributions must be in cash except permitted rollovers from other accounts. To learn more, see: Contributions To An HSA.

You can invest in an HSA in 2021 up to the following amounts (including money your employer may contribute to your HSA):

  • For individuals: $3,600 
  • For families: $7,200
  • If you were born before 1967, you can put in $1,000 more. Excess payins are not deductble and are subject to a 6% yearly excise tax until withdrawn.
  • If you had an HSA-eligible policy for only the first few months of the year, your contirubiton limit is based on the number of months that you had the policy. However, if you had the policy on December 1 of the year, you can make the full year's contribution if you keep the HSA-eligible policy for all of the next year. If you don't keep the policy for the full year, there is a penalty to pay.

Contributions can be made into an acount until the tax-filing deadline for the particular year - usually April 15 of the following year.

Withdrawal of money from an HSA

  • Medical expenses: Money from an HSA can be withdrawn tax-free to pay routine medical bills such as doctor visits or prescription drugs of your choice - including moneys due as part of your deductible or co-payments.(For information about medical expenses for HSA purposes, click here.) 
  • Non-medical expenses: You can also take distributions to pay for non-medical expenses. However, distributions for non-medical expenses are subject to income tax. In addition, if you are younger than age 65, there is a 20% penalty on any non-qualified withdrawal. After age 65, the withdrawal is subject to income tax, but not to a penalty.

Most HSA plans include a debit card and an online bill-payment option.

The assets in which money in an HSA can be invested are limited.

The money in an HSA does not have to be spent by the end of the year. Balances at the end of the year can be carried over into the next year (unlike flexible spending accounts).  

You can keep the account whether you change jobs or move or become disabled.

What happens to an HSA on demise of the account holder depends on who the beneficiary is.

HSAs are generally available through employers as a health benefit. HSAs can also be purchased directly from an insurer if you are self-employed or your employer doesn't offer health benefits.

No permission is required from the IRS to set up an HSA. All contributions, distributions, and return of excess contributions are reported to the IRS.

You can have both an HSA and another tax advantaged account known as an FSA (Flexible Savings Account).

There are separate rules for married people and different rules about other types of tax advantaged health plans. (To learn more, see: HSAs: Married People).

If you lose your job:

  • Money in an HSA is yours, even after you leave your job.
  • You can transfer money in an HSA to another HSA administrator without having to pay a tax. To locate an HSA with the least amount of fees, you can compare accounts at offsite link
  • The money can be used tax-free for future medical expenses in any year - even if you no longer have a high-deductible health insurance policy.
  • Before you can make new contributions, you must have a high-deductible health insurance policy. It doesn't matter whether the policy continues from your former employer thanks to COBRA or if you have another policy.  (The account can continue to grow even if you cannot make new contributions).

When opening an HSA, it is advisable to look around - including looking for a custodian or trustee that does not charge for taking care of the account.

There are tips for maximizing use of an HSA. For instance, if you can afford it, use money that is not in the HSA to pay expenses not paid for by your HDHP.

For additional information about HSAs, see: 


  • While you do not send back-up with your tax return, it is your obligation to keep records to show the following: 
    • The funds you withdrew from the HSA were used to reimburse or pay for qualified medical expenses.
    • The expenses had not previously been paid or reimbursed by another source.
    • The expenses were not taken as an itemized deduction in any year.
  • Surveys indicate that people with a high-deductible health plan often choose not to seek medical care for minor ailments. Keep in mind that small health problems left untreated can become big problems. They can also affect treatment for your health condition.

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