5 things to know about HSAs

If you’re looking for ways to bring down your health care costs next year, you may want to consider the benefits of a health savings account (HSA).

An HSA enables you to lower your federal taxable income by setting aside pre-tax money to pay for  health costs not covered by your plan, including some dental, prescription and vision expenses.

“Deductibles, copays and other qualified out-of-pocket costs can all be paid with HSA funds,” said Rebecca Madsen, chief consumer officer at UnitedHealthcare. “Better yet, if you don’t need to use the funds, they can become an interest-bearing nest egg that grows over time.”

Think of an HSA as a personal savings account that provides funds for health costs and investment opportunities. HSAs are often described as having a triple-tax advantage because:

  • Funds are not taxed when deposited in an HSA and are not counted as federal income at tax time
  • Interest and other potential investment income from HSAs grow tax-free
  • Money is not taxed when it’s eventually used if it’s spent for qualified medical expenses

Worth noting: Each state can decide to follow the federal tax guidelines for HSAs or establish its own. Most but not all have conformed to federal guidelines.

An estimated 63 million Americans have access to an HSA, but fewer than half have actually contributed funds during the last year — passing up the tax benefits in the process.

“As with any health plan, there are important details,” Rebecca said. “To make the most of an HSA, you need to understand how these accounts work.”

Here are several important facts to know:

1. HSAs are paired with high-deductible plans

A deductible is an amount you pay for health care before insurance coverage begins for anything other than preventive care. To qualify for an HSA, you must have a health plan with a high deductible. For the plan year 2023, the qualifying deductible is at least $1,500 for an individual or $3,000 for a family.

2. There are annual contribution limits.

HSA contributions are 100% tax-deductible up to the annual limit. For 2023, you can contribute up to $3,850 for self-only coverage and up to $7,750 for family coverage. If you’re 55 or older, you can make an additional catch-up contribution of $1,000.

3. Withdrawals for health expenses are tax-free

Money from an HSA can be withdrawn tax-free when the funds are used for qualified medical expenses — before or during retirement. After you turn 65, you can spend the funds on anything without a penalty. However, if it’s not for a qualified medical expense, the funds will be taxed as income at your then-current tax rate.

4. Leftover funds remain in your account

Unlike a flexible spending account (FSA), there is no end-of-the-year “use it or lose it” provision with an HSA. You own the account, and the money is yours — even if you change jobs. Your money rolls over from year to year, enabling you to build tax-free savings to pay for future medical care, which may increase in frequency and cost as you age.

5. You may be able to earn interest and invest funds

Besides the tax benefit with the initial contributions to an HSA, interest earned is not subject to federal taxes as long as the money is used for qualified medical expenses. Additionally, you may be able to use money in the account to invest in stocks, bonds or money-market funds. Currently, few account holders pursue this option, even though it may be one of the biggest advantages of an HSA.

For more information about HSAs, consider talking with your company’s human resources representative.

Something else to consider: Open enrollment season can be a good time to evaluate whether you have the necessary level of financial protection to get you and your family through an unforeseen medical issue or event. Consider adding a life, disability, critical illness, hospital indemnity or accident insurance policy. These plans may provide financial assistance and claims support after a serious health event or diagnosis – and may help cover out-of-pocket expenses, such as your health plan’s deductible.

What's the difference between HSA, HRA, and FSA?

Sign up to get the latest news from the UnitedHealthcare Newsroom