A Health Savings Account (HSA) can be set up in three simple steps, and once it’s up and running, it can help you bridge the gap between what your health insurance covers and your actual costs, among other benefits.
Let’s face it: Many of us these days select a High Deductible Health Plan, or HDHP, when it comes to health insurance. That means you may be paying a lower monthly premium in exchange for a high deductible. You could potentially get hit with a lot of unforeseen healthcare expenses before your benefits kick in. And even after you meet that deductible, you may have charges that are not reimbursed. A Health Savings Account (HSA) can help you set money aside to fill that gap.
Setting up an HSA may sound intimidating, as if you’ll have to fill out reams of paperwork, but that’s not at all the case! Whether through an employer or on your own, once you’re ready to start saving, the steps to opening an HSA account can be as simple as filling out an online form with basic information — easy peasy.
Here’s a look at the steps involved, plus a few important considerations before you take the leap.
Key Points
• Eligibility for a Health Savings Account (HSA) requires enrollment in a high deductible health plan without other health coverage or Medicare.
• Setting up an HSA involves selecting a provider, completing paperwork, and verifying health plan coverage.
• Contributions to an HSA are pre-tax, reducing taxable income and allowing tax-free growth, with a maximum limit set annually.
• Funds from the HSA can be used to pay for a wide range of medical expenses, including those not covered under typical health plans.
• After age 65, funds can be used for any purpose without penalties, though they will be taxed if not used for qualified medical expenses.
What Is a Health Savings Account (HSA)?
The HSA will be turning 21 soon: In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act which created the Health Savings Account. These accounts were meant to help people with high deductible health plans set aside money to pay for out-of-pocket medical expenses: copays, dental care, eyeglasses, prescriptions, psychiatric help, and more. This can happen both before and after you reach your deductible.
In addition to covering health costs, these tax-free accounts can lower your amount of federal income tax owed. What’s more, HSAs can help with saving for retirement and unforeseen emergencies.
How Does an HSA Work?
A Health Savings Account can work just like a checking account. You can make deposits (or contributions), pay bills online, make transfers, and even pay for qualified medical expenses with an HSA debit card. You are free to withdraw HSA funds at any time to pay for health costs not covered by your high deductible health plan. One big note: Once you enroll in Medicare, you can no longer contribute to an HSA.
Deposits can also be contributed by your employer, with direct deposits made into your HSA straight from payroll. A nice aspect of these plans: Health Savings Account contributions roll over every year, so you don’t have to race to spend the pre-tax funds in your account. If you stay healthy, you can build up your emergency fund as well as your retirement nest egg. Your good health can lead to wealth down the line!
Who Can Open an HSA?
According to Federal Guidelines, you qualify to open a Health Savings Account if you:
• Are covered under a high deductible health plan, or HDHP.
• Are not covered by any other health plan, including a spouse’s.
• Are not claimed as a dependent on someone else’s tax return.
• Are not enrolled in a disqualifying alternate medical savings account, such as an FSA (Flexible Spending Account) or an MSA (a Medicare medical savings account).
• Are not currently enrolled in Medicare.
How to Set Up a Health Savings Account
Once you’ve established that the pros outweigh the cons, you may wonder exactly how to set up a Health Savings Account (HSA). Fortunately, the process is pretty straightforward:
Step 1: Research Your HSA Options
If an HSA plan is offered directly through your employer, go to Step Two.
If you’re self-employed, investigate HSA options online, or reach out to banks or other financial entities.
Step 2: Fill Out the Necessary Paperwork
The set-up for an HSA is not unlike opening a bank account. You’ll be provided with paperwork or an online form, where you’ll give basic information such as your Social Security Number and proof of your identity (typically verified by a government-issued photo ID).
Step 3: Complete Verification
Be prepared to offer verification of your high deductible health plan (HDHP).
That’s it! It’s a quick and simple process to set up a Health Savings Account.
Once your HSA is up and running, you may be able to opt for automatic regular deposits from your bank account or straight from your paycheck. There is no minimum amount required to open an HSA, but you typically need at least $1,000 in the account in order to invest in certain mutual funds.
HSA Contribution Limits
For tax year 2023, HSA contribution limits are $3,850 for individuals and $7,750 for families with HDHP coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. For 2024, HSA contribution limits are $4,150 for individuals and $8,300 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. There is never a minimum requirement for deposits. Some ground rules to be aware of:
• You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
• You have no supplemental health coverage except what is permitted under other health coverage.
• You aren’t enrolled in Medicare.
• You can’t be claimed as a dependent on someone else’s tax return.
Advantages of an HSA
There are many benefits to opening an HSA. Sure, it can provide a cushion or safety net when it comes to out-of-pocket medical costs. But there are other perks beyond covering the price of a new pair of glasses.
Covering Expenses for You and Your Family
From ambulances to acupuncture, a Health Savings Account can cover the costs your HDHP doesn’t. The IRS has an extensive listof ways you can use your HSA funds. One example: Did you know you can also use your Health Savings Account to pay for medical expenses for a spouse or a child — anyone who is part of your tax household — even if they aren’t on your HDHP? It’s true!
Lowering Taxable Income
Here’s another bonus to having this kind of account: Your HSA contributions are made before taxes are deducted, thereby lowering your taxable income. As a result, you may pay less in taxes.
Rollover Contributions
There’s no “use-it-or-lose it” pressure when you have a Health Savings Account. Unused HSA funds don’t disappear at the end of the year. You can roll them over again and again, accumulating tax-free interest. Those earnings can turn into savings to be invested in the future or used for life’s little surprises — say, a chipped tooth.
Saving for Retirement
At age 65, you can start using the funds in your Health Savings Account for anything, without penalty. Withdrawals will be taxed the same as they would from a 401(k) or IRA, but any funds waiting for use will avoid taxes while earning interest.
Additionally, if you are lucky enough to be able to max out your annual IRA and/or 401(k) contributions, an HSA is another way to save more tax-free money toward retirement. Beyond covering copays, an HSA is a great way to get your money working for you.
Disadvantages of an HSA
Okay, now you know the upside of opening an HSA. But there are potential downsides that are worth knowing about and considering before you sign up.
Penalties for Unqualified Expenses
Until you turn 65, HSA funds cannot be used for anything but eligible medical expenses. To do so would subject withdrawals to income taxes and a 20% penalty.
Monthly Fees
Health Saving Account providers may charge a monthly fee. These fees generally tend to be lower than $5 bucks per month, but they do add up. While there are providers out there that don’t charge account management fees, all will assess an investment fee. Do your homework to find the vehicle with the lowest fees.
Potential Losses
Like an IRA or 401(k), any invested money in an HSA can mean monetary gains and losses. As with any investment account, you need to be prepared for your HSA balance to dip if the market trends downward.
Keeping Tabs for Your Tax Records
HSA contributions and expenditures must be reported on your tax return. It may not be a deal-breaker, but for some people, keeping records of your HSA activity can be a nuisance.
| Pros | Cons |
|---|---|
|
• Covers an extensive list of out-of-pocket health expenses • Can be used for family members • Lowers taxable income and therefore may decrease your taxes • Contributions roll over to the next year • Promotes tax-free savings for retirement |
• Penalties for nonqualified expenses • Unexpected and potentially hidden fees • Account balance can fluctuate with the marketplace • Activity must be reported on your tax return |
Things to Consider When Choosing an HSA
If your job offers a Health Saving Plans, great! They’ve done the research for you. Employers may also offer Flexible Spending Accounts (FSAs). But unlike FSAs, which are owned by an employer and can be inflexible, a Health Savings Account has higher contribution limits and is controlled by you.
If you are self-employed, do your research. You’ll find an array of Health Savings Plans to choose among; HSA comparison websites can help you navigate the search. Remember to pay attention to any monthly/annual fees so you know exactly what to expect. Ideally, you’ll want an HSA that makes it easy to manage your account online. Many banks and credit unions offer HSAs, so check with your financial institution.
The Takeaway
Once you’ve made the decision to enroll in a Health Savings Account, the steps to set it up are relatively painless. You can start using your HSA funds right away to help cover qualified health-related costs. Contributions are made with pre-tax dollars, don’t need to be used up by the end of the year, and can potentially even help boost your retirement fund. A Health Savings Account goes beyond just covering your healthcare expenses and can serve as one of the best tax-advantaged savings vehicles available. It can enhance your sense of security and keep your wealth growing.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How do I set up an HSA account?
With a valid government-issued photo ID, Social Security number, and proof of your HDHP, you can fill out a basic paper or online HSA form, provided by an employer or financial institution.
Can I start an HSA on my own?
Yes. As long as you are enrolled in an HDHP and not covered under someone else’s policy, you can start an HSA.
How much does it cost to open an HSA?
The initial sign-up is free, and there is no minimum deposit amount to start. But expect investment fees and possibly monthly management fees.
Photo credit: iStock/AndreyPopov
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