Health Savings Account (HSA)

What is a Health Savings Account (HSA)?

A Health Savings Account is a savings vehicle that is tied to a HSA-qualified high-deductible health plan (HDHP). As with 401k accounts and Flexible Spending Accounts (FSA), Health Savings Accounts offer tax benefits for employees. The money that employees deposit into HSA accounts reduces their taxable income rather than acting as a direct deduction like FSA funds. Employees can then spend the money on qualified medical expenses without any tax penalty.

As with 401K and FSA accounts, there are also limits on how much an individual or family may deposit. Employers also have the option to match HSA contributions.

Unlike FSA funds, HSA funds can be kept in many different types of savings accounts. In fact, many HSA plans encourage employees to invest their funds in the stock market and earn a return.

The money in an HSA belongs to the employee. These accounts may provide employees with a credit card linked to their account, making it easier to pay for medical purchases. Employees can spend these funds on other items than approved medical expenses, but if they do so, then they pay a tax penalty on that spending. After age 65, an employee’s HSA funds may be spent without penalty, much like other retirement investments. After age 55, employees can contribute an additional $1,000 per year to their HSA as a “catch-up”.

By law, HSAs are always attached to high-deductible health plans. These plans often have lower premiums and higher maximum-out-of-pocket amounts than other health plans. Employees may end up paying more for the medical care they receive while saving on premium costs. To get the most benefit from an HSA plan, an employee will need to contribute enough from each paycheck to pay the costs of their current medical care and prepare for unexpected costs. While this can lead to savings for healthy employees, starting an HSA may not be the best option for employees with chronic conditions or with major upcoming expenses (such as childbirth or scheduled surgeries).

While Health Savings Accounts and Flexible Spending Accounts both involve employees setting aside funds from their paychecks for medical expenses, there are major differences in how each account works and the requirements to implement each one. In general, If your organization offers one or both of these accounts, you will need to educate your employees on the difference between the two programs and clarify which program(s) you offer.