What is an HSA? Health Insurance Explained

by Zencare team

You might be wondering what an HSA is and how you can get one - or, more importantly, if opening an HSA will have any benefit for you. We’ve collected all the information you need to know about HSAs so you can get those answers.

What is an HSA?

HSA stands for Health Savings Account. This is a bank account where you can deposit pre-tax dollars (that is, money coming out of your paycheck before it’s subjected to taxes). The money within this bank account and the interest accrued will also not be taxed, even at time of withdrawal. The savings in your HSA will then help you pay for medical expenses such as copays, medications, medical equipment, therapy sessions, and even tampons!

You and/or your employer can contribute to your HSA, which has a yearly contribution limit of $3550 in 2020. There are some other limitations to HSAs, most significantly that in order to have an HSA, you must be enrolled in a High Deductible Health Plan (HDHP), that is an insurance plan that has a deductible of $1400 in 2020. Having an HDHP means that you will have to meet your deductible before the insurance plan begins covering your medical care – which is why HSAs are seen as a tool to make health insurance more affordable.

How do I get an HSA?

If you’re eligible (have a HDHP), you can either start an HSA by yourself or with your employer. Ask your employer if they offer an HSA and if they will match your contributions. If they do not, find an HSA plan for yourself online - there are many to choose from! Remember, this is a savings account, which means that different banks will offer different incentives like interest rates.

What are the benefits of having an HSA?

There are many great reasons to start an HSA. Here are a few:

  • This is your account. Unlike an FSA, this account is not tied to your employer, which means that even if you switch jobs, you will still have access to this money.
  • Saving money without paying tax. Most people open HSAs to save money on their taxes - since you will use your pretax dollars to contribute to an HSA, there is no tax on the interest you earn, and there are no taxes owed when you withdraw.
  • The money rolls over. Even if you don’t use all of your money throughout the year to pay for medical expenses, it will continuously roll over. Imagine how much money you could have in your HSA after 20 years of contributing!

What are the downsides to having an HSA?

As with any health insurance tool, there are also limits to HSAs. Keep in mind the following when considering opening an HSA:

  • You must have an HDHP. If you do not have a qualifying insurance plan, you will not be eligible for an HSA. This makes it tricky to switch insurance plans or shop around for lower cost plans.
  • Putting aside money each month. Depending on your budget, it may be difficult to set aside a few hundred dollars each month towards an HSA. If you don’t have extra money outside of living expenses, it may be difficult to build your HSA and make it useful for your healthcare.
  • Using HSA money for non-medical expenses. If you withdraw money from your HSA for non-eligible costs, you will have to pay tax on that money.
  • Administrative efforts. In order to keep up with your HSA, you will likely need to be organized and able to complete the required HSA forms for each expense. If paperwork like this stresses you out, consider the pros and cons of starting an HSA - you wouldn’t want to start one and then never use it because of the effort it takes!

What should I keep in mind when setting up my HSA?

If you’re ready to open an HSA, here are a few guiding thoughts to help the process:

  • Determine your budget. Figure out how much money you would like to contribute to your HSA each month (or each paycheck) based on your living expenses and other monthly costs. Find an amount that is both comfortable for your lifestyle and will grow your HSA.
  • Think about your healthcare needs. While health is incredibly unpredictable, think through what healthcare services (including therapy!) you might have for the following year. If you foresee copays or medication costs adding up, plan those expenses into your HSA as top priority.
  • Maintain your insurance plan. Even if you switch employers or need to find a different insurance plan, keep in mind that you must have an HDHP in order to be eligible for an HSA.

Having an HSA is a great way to save some money on your taxes while still accessing care (like therapy!). As you search for a vetted therapist in your area, consider your financial needs and whether having an HSA will be beneficial for you.