Understanding Health Savings Accounts (HSAs)

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Q. I chose a high-deductible health plan this year to reduce my premiums. Is there anything more I can do to manage health care expenses?

A. Your high-deductible health insurance plan may qualify you for a Health Savings Account or HSA. An HSA is a tax-advantaged savings account that can be used to pay qualified expenses with pre-tax dollars.

Q. Who is eligible to open an HSA?

A. HSAs are available to individuals and families who are enrolled in highdeductible healthcare plans (HDHPs). These are plans that, while they may offer lower premiums, come with higher out-of-pocket expenses, such as deductibles and co-pays. With an HSA, you can accumulate pre-tax savings to cover both planned and unplanned healthcare-related expenses.

Q. How does an HSA work?

A. Opening an HSA is about as simple as opening any other bank account. There are a few up-front questions to ensure that you qualify. Once funded, you’ll discover three significant tax benefits:

• Your contributions are tax deductible. Contributions to an HSA operate in the same manner as a 401(k). You contribute pre-tax dollars, thereby reducing taxable income.

• Earnings grow tax-free. Balances accumulate similar to an IRA.

Any investment earnings on your HSA contributions are not taxed.

• Withdrawals are tax-free. As long as your withdrawals are used to cover qualified medical expenses, you will pay no taxes on the money you withdraw. You can find a list of qualified medical expenses on the IRS website (www.irs.gov).

Q. Open enrollment season is over. May I still open an HSA?

A. Yes. Unlike a Flexible Spending Account (FSA), Health Savings Accounts can be opened at any time during the year. You may also change your contribution rates at any time or even invest a single lump sum.

Q, But if my healthcare expenses are lower than I’m expecting, will I lose the money I’ve saved in my HSA?

A. HSA contributions aren’t limited to any calendar year. If you don’t use the funds this year, they’ll roll over into following next year. Balances can accumulate over time, similar to an IRA. When you turn 65, money in your HSA can be withdrawn for reasons other than healthcare, though such distributions will likely be taxable.

Q. An HSA sounds like a great idea! Is there a limit on how much I can deposit?

A. Yes, there is a limit on the amount you can contribute. For 2023, those limits are $3,850 for an individual and $7,750 for a family. Plus, individuals over 55 may make a one-time catch up contribution of $1,000.