What Is an HSA?

What Is an HSA?

It’s important to plan for emergencies before they happen. We never know when the unexpected will interrupt our daily lives, especially when it comes to medical emergencies. And not all medical expenses are reimbursed by high-deductible health plans (HDHP). What happens if you suffer from an accident and need an ambulance to the emergency room or you have to pay out-of-pocket for necessary health care such as hearing aids, prescription drugs, or long-term care services? You may find your funds are insufficient. Don’t let uncovered medical costs become a financial hardship.

You can get the care you need without added stress by opening a health savings account (HSA). What is an HSA? Keep reading to learn what an HSA is, what it covers, and how it can help you save money for future medical expenses. Gain financial confidence and rest easy knowing you can get the care you need when you need it the most, without worrying about the cost.


A health savings account is a type of personal savings account used to pay for qualifying health care costs. It is a tax-advantaged account to which individuals or their employers can make contributions to save for certain medical expenses. Essentially, account holders can save money earmarked for future medical expenses or unexpected health emergencies and then withdraw funds tax-free to cover qualified medical expenses.

Qualified health care costs can range from deductibles to copayments and coinsurance and can cover health care needs that include vision, dental, medical care, and prescription drugs. These accounts are designed to help people save for medical costs that are not reimbursed by their HDHPs.

Who Is Eligible for an HSA?

You are eligible to contribute to an HSA if you have a qualified HDHP. These are also commonly referred to as HSA-eligible plans. These eligibility standards are set forth by the IRS and require individuals to have a qualified HDHP as well as no other health coverage. Eligible individuals may not be enrolled in Medicare nor be claimed as a dependent on someone’s tax return.

If the above requirements describe your current situation, you may be eligible for an HSA and can apply through your credit union, bank, or other financial institution. Capital Credit Union in northeast Wisconsin, for instance, offers a high-earning health savings account (HSA) so you can plan with added savings.

Which Medical Expenses Are HSA Eligible?

As mentioned, tax advantages are only accessible for qualified medical expenses. That is, you can only use your HSA money tax-free without penalty for qualified withdrawals. Which medical expenses are eligible? Typically, visits to the doctor or dentist are eligible as well as prescription drugs. Some home care, medical equipment, supplies, and imaging such as MRIs and X-rays are also covered. Generally, eligible expenses may also include:

•         Hearing aids

•         Eyeglasses

•         Physical therapy

•         Chiropractic services

•         Acupuncture

•         Prescription drugs

•         Psychological counseling

•         Breast pumps

•         Ambulance costs

•         Doctor’s visits

•         Long-term care

For an extensive list of possible eligible and ineligible expenses, click here. Keep in mind, that the IRS may alter this list, so it’s important to consult with a tax adviser if you are uncertain of eligible medical expenses. However, eligibility lists are helpful tools to determine what you can spend your money on penalty-free. Explore the list to learn how extensive the eligible items are.

How Does an HSA Work?

Anyone can contribute to your HSA. This includes family members, friends, and even your employer. Self-employed and unemployed individuals may also contribute to an HSA. There are certain annual limits on HSA contributions, depending on your type of coverage, as well as your age and the year you qualified. For instance, if you qualified in 2023, the maximum amount you can put in your HSA annually is $3,850 for self-only coverage and $7,750 for family coverage. If you are 55 or older, you can make a “catch-up” contribution of an additional $1,000 each year.

Any unused account balances at year-end can roll over to the next year. There is no “use it or lose it” policy. This enables you to build tax-free savings to pay for future medical care. The interest earned on HSAs is not subject to taxes. These funds can be used to directly pay for eligible health care or reimburse yourself for qualified out-of-pocket medical costs.

What happens if you make unqualified purchases with your HSA account? In short, you will have to pay income tax on the amount. If you withdraw money before you are 65 to make non-medical or ineligible medical purchases, you will have to pay a 20 percent tax penalty in addition to the federal income tax. If you are over 65, you will only have to pay the federal income tax, not the 20 percent tax penalty. If you are uncertain if your medical expenses qualify, consult with a tax adviser before using your HSA and avoid penalties.

Why Should I Open an HSA?

There are many financial advantages to opening an HSA. These include, but are not limited to:

  • No federal income tax: You’re not taxed on the money you contribute or the interest you earn. Withdrawals on qualifying medical expenses are also tax-free.
  • Employers can make contributions to your HSA: You can grow your money with the help of your employer.
  • HSAs are tax deductible: Direct contributions to an HSA are 100 percent tax deductible from an employee’s income.
  • Your HSA account is yours: Your HSA account is yours to keep if you change jobs or retire.
  • You can invest in HSA funds: You have the option to use a portion of your funds to invest in stock or other securities and yield higher returns over time. You can build your HSA savings and gain financial confidence for future medical needs.
  • HSA funds don’t expire: You keep your money until you need it. You are not subject to “use it or lose it” policies.

 Please speak with your tax advisor before opening an HSA (Health Savings Account) to determine if it’s right for you.

Plan ahead and start your HSA early. If you qualify, start building your medical spending nest egg and secure both your financial and healthcare future!