Opting into an HSA is a question many of us face annually, usually during Open Enrollment season. If you’re unclear if this health-related savings account is right for you, read on.

What Is an HSA?

HSA stands for health savings account, a special tax-advantaged savings account used to pay for health-care-related expenses. It can be a powerful tool for reducing your health care costs now and covering them in retirement. 

The money you contribute to the account is pre-tax, meaning the contributions you make reduce your taxable income. In addition, the money can grow in your account tax-free—and withdrawals from the account are tax-free as long as you use the funds to cover qualified health care expenses.

Who Can Open an HSA?

Unfortunately, HSAs aren’t available to everyone. To qualify, you must be covered by a high-deductible health plan (HDHP), which has higher annual deductibles and out-of-pocket maximums than traditional health insurance plans.

While deductibles vary by plan, the IRS currently requires HDHPs to have a minimum deductible of $1,400 for individual coverage or $2,800 for families. And the minimum annual out-of-pocket expenses can’t exceed $7,050 for individual coverage or $14,100 for families.

In addition to the HDHP requirement, to contribute to an HSA:

• You can’t be claimed as a dependent on another person’s tax return
• You (or your spouse) can’t be covered by another qualifying insurance policy, including Medicare
• You (or your spouse) can’t be covered by a flexible spending account (FSA) or health reimbursement arrangement (HRA), which is another kind of employer-funded account used to reimburse employees for their health care expenses.

HSA vs. FSA

People often confuse HSAs with FSAs. Both can reduce your taxes and help you pay for qualified health care expenses, but there are some crucial differences.

First, you own your HSA. If you leave your job, you can take the account—and all the money you’ve saved in it—with you. But your employer owns your FSA, so if you leave your job for any reason, you forfeit all your FSA funds.

FSAs also have “use it or lose it” rules. This generally means you have until the end of the calendar year to spend the money in your FSA or the money reverts to your employer. However, some FSAs give you an extra two-and-a-half-month grace period to spend the money or allow you to roll over up to $570 of it to the following year.

HSAs, on the other hand, don’t put a deadline on spending your funds. You can keep any unspent money in your account indefinitely. In fact, you can put money into your HSA now and delay using the money until retirement, effectively turning your HSA into another retirement account.

What Are HSA-Eligible Expenses?

You can use your HSA to pay for qualified medical, dental and vision expenses for you, your spouse and your eligible dependents—including many costs that aren’t typically covered by health insurance. 

Some common qualified medical expenses are below, and you can find a more extensive list in IRS Publication 502:

• Ambulance fees
• Bandages
• Birth control pills
• Blood sugar test kits
• Breast pumps and supplies
• Chiropractor services
• Contact lenses and supplies
• Dental treatments
• Doctor visit co-pays
• Eye exams and eyeglasses
• Fertility treatments
• Hearing aids
• Lab fees
• Long-term care expenses
• Meals and lodging while receiving medical care
• Medical insurance premiums
• Over-the-counter medications
• Pregnancy tests
• Prescription medication
• Psychiatric care
• Smoking cessation programs
• Substance abuse treatment
• Transportation to and from medical care
• Weight-loss programs to treat a specific disease

You can withdraw money from your HSA at any time. However, if you use the funds for anything other than qualified medical expenses, the amount you withdraw counts as taxable income and the IRS also charges a 20% penalty.

Once you reach age 65, you can withdraw money from your HSA without penalty, but the withdrawals are taxable income if you don’t use them for qualified medical expenses.

HSA Contribution Limits

Each year, the IRS sets contribution limits for HSAs. For 2022, those limits are $3,650 for individuals or $7,300 for family coverage. In 2023, those limits will increase to $3,850 for individuals and $7,750 for families.

People age 55 or older can contribute an extra $1,000 “catch-up” contribution to their HSA account each year.

Should You Get an HSA?

If you’re already covered by an HDHP at work, there’s no downside to contributing to an HSA. Since no taxes are withheld from HSA contributions made through payroll deductions, you’ll have more buying power when paying for health care expenses.

The decision to open one gets a bit murkier if you need to decide between an HDHP/HSA combo versus a traditional health care plan. If you have a chronic medical condition or know you’ll need expensive care in the year to come, compare the savings you’ll get from an HSA to those you’ll get from a traditional insurance plan. If the traditional plan has a much lower deductible or broader coverage, it might be the better choice.

Knowing if and when you should get an HSA can be confusing, but if you have access to one through work, it’s worth learning about. Between insurance premiums, deductibles, co-pays and medications, health care costs can account for a significant portion of your budget (if not now, then almost certainly in the future). So setting aside some money to cover those costs can make you feel healthier—physically, mentally and financially.

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Janet Berry-Johnson is a certified public accountant and a freelance writer who enjoys making complicated topics, like accounting and taxes, easy to understand.