Health care costs can be a major burden for many Americans, especially those who have high deductibles, copayments, coinsurance, or other out-of-pocket expenses. Fortunately, there is a way to save money on health care while also enjoying tax benefits: a health savings account (HSA).

An HSA is a special type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for health care costs, you can lower your taxable income and save money in the long run. Plus, you can invest the money in your HSA and earn tax-free interest or returns, which can help you grow your savings over time.

But how do you open and use an HSA? What are the types and rules of HSAs? And what are the benefits and drawbacks of HSAs? In this article, we will answer these questions and help you understand how to save money on health care with HSAs.

What are the types and rules of HSAs?

There are two main types of HSAs: employer-sponsored HSAs and individual HSAs. Employer-sponsored HSAs are offered by employers as part of their health benefits package. They are typically funded by both the employer and the employee through payroll deductions. Individual HSAs are opened by individuals who have an HSA-eligible health plan. They are usually funded by the individual through direct deposits or transfers from a linked bank account.

To open and contribute to an HSA, you must meet certain eligibility requirements. According to the IRS, you must:

- Be covered by a qualified high-deductible health plan (HDHP) that meets the minimum deductible and maximum out-of-pocket limits for the year. For 2022, the minimum deductible is $1,400 for self-only coverage and $2,800 for family coverage. The maximum out-of-pocket limit is $7,050 for self-only coverage and $14,100 for family coverage¹.
- Not be covered by any other health plan that is not an HDHP, such as a spouse's or parent's plan, Medicare, or TRICARE.
- Not be enrolled in Medicare.
- Not be claimed as a dependent on someone else's tax return.
- Not have used Veterans Administration medical benefits in the past three months, unless you have a service-connected disability or have only accessed preventive services².
- Not have any disqualifying alternative medical savings accounts, such as a flexible spending account (FSA) or a health reimbursement arrangement (HRA).

The IRS also sets the maximum amount that you can contribute to an HSA each year. For 2022, the contribution limit is $3,650 for self-only coverage and $7,300 for family coverage. For 2023, the contribution limit is $3,850 for self-only coverage and $7,750 for family coverage³. If you are 55 or older, you can make an additional catch-up contribution of $1,000 per year.

You can make contributions to your HSA at any time during the year, as long as you are eligible. You can also make contributions for the previous year until the tax filing deadline of the current year, usually April 15. For example, you can make contributions for 2022 until April 15, 2023.

You can use the money in your HSA to pay for qualified medical expenses, which are defined by the IRS as the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Some examples of qualified medical expenses are:

- Doctor visits, hospital stays, surgeries, and lab tests
- Prescription drugs and over-the-counter medicines (with a prescription)
- Dental and vision care, including exams, glasses, contacts, and braces
- Hearing aids and batteries
- Chiropractic and acupuncture services
- Physical and occupational therapy
- Psychiatric and psychological care
- Smoking cessation programs and products
- Breast pumps and lactation supplies
- Long-term care services and insurance premiums
- Medicare premiums and copayments

You can find a complete list of qualified medical expenses in IRS Publication 502⁴. You can also use your HSA to pay for the qualified medical expenses of your spouse or dependents, even if they are not covered by your HDHP.

You can access the money in your HSA through a debit card, checks, online transfers, or reimbursements. You will need to keep receipts and records of your medical expenses and HSA transactions for tax purposes. You will also need to report your HSA contributions and distributions on your tax return using Form 8889⁵.

You can use the money in your HSA at any time, as long as it is for qualified medical expenses. There is no time limit or expiration date for your HSA funds. Unlike an FSA, an HSA has no use-it-or-lose-it rule. Any unused money in your HSA will roll over to the next year and continue to grow tax-free. You can also keep your HSA if you change jobs, switch health plans, or retire. You own your HSA and have full control over it.

What are the benefits and drawbacks of HSAs?

HSAs have many benefits, such as:

- Tax savings: You can reduce your taxable income by making pre-tax or tax-deductible contributions to your HSA. You can also avoid paying taxes on the interest or returns earned by your HSA investments. And you can withdraw money from your HSA tax-free, as long as it is for qualified medical expenses.
- Flexibility: You can decide how much to contribute to your HSA, up to the annual limit. You can also choose how to use your HSA funds, whether to pay for current or future medical expenses, or to save for retirement. You can also change your contribution amount or stop contributing at any time, without penalty.
- Portability: You can keep your HSA even if you change jobs, switch health plans, or retire. You can also take your HSA with you if you move to another state or country. Your HSA belongs to you and stays with you, regardless of your employment or health insurance status.
- Growth potential: You can invest the money in your HSA in various options, such as mutual funds, stocks, bonds, or exchange-traded funds (ETFs). You can also earn interest on the money in your HSA. By investing your HSA funds, you can potentially grow your savings over time and benefit from compound interest.

However, HSAs also have some drawbacks, such as:

- Eligibility requirements: You can only open and contribute to an HSA if you have an HDHP and meet the other eligibility criteria. This means that you may have to pay a higher deductible and more out-of-pocket costs before your health insurance kicks in. You may also have to give up other health benefits, such as an FSA or an HRA.
- Contribution limits: You can only contribute a certain amount to your HSA each year, based on your coverage type and age. If you overcontribute to your HSA, you may have to pay a 6% excise tax on the excess amount, unless you withdraw it before the tax filing deadline. You may also have to pay income tax and a 10% penalty on the excess amount if you use it for non-qualified medical expenses.
- Recordkeeping and reporting: You have to keep track of your medical expenses and HSA transactions, and keep receipts and records for tax purposes. You also have to report your HSA contributions and distributions on your tax return, and file additional forms and schedules. You may need to consult a tax professional or use a tax software to help you with your HSA taxes.

Conclusion

An HSA can be a great way to save money on health care while also enjoying tax benefits. By using an HSA, you can pay for qualified medical expenses with pre-tax dollars, invest your HSA funds and earn tax-free interest or returns, and withdraw money from your HSA tax-free. You can also keep your HSA funds indefinitely and use them for future health care costs or retirement.

However, an HSA also has some rules and limitations that you need to follow. You can only open and contribute to an HSA if you have an HDHP and meet the other eligibility requirements. You can only contribute up to a certain amount to your HSA each year, and you can only use your HSA funds for qualified medical expenses. You also have to keep records and report your HSA activities on your tax return.

Therefore, before you open and use an HSA, you need to weigh the pros and cons and see if it suits your needs and goals. You also need to do your research and compare the types and rules of HSAs, and see which one works best for you. By doing so, you can make the most of your HSA and save money on health care.