Health Savings Account (HSA)

insurancebrochure Health Insurance HSA Health Savings Account

Health Savings Accounts

What's it all about?

A tax deduction, nothing else.

The only reason to have a Health Savings Account is to get an additional deduction on your Federal tax return under the Internal Revenue Code.

A Health Savings Account (HSA) is a savings, checking, or investment account. It is not an insurance policy. It is NOT tied to, nor are there any rules of coordination with, your health insurance coverage. However, you must first have HSA-qualifying health insurance first to be entitled to have such an account.

Think of a Health Savings Account as an ordinary bank account or brokerage account, but with a few rules such as a limit on how much you can deposit each year, and you get a tax deduction for what you put in.

It is nothing like an employer-sponsored Flexible Spending Account. It's just your money, in your account, compounding tax-free, with no upper limit on the accumulating balance.


1. Apply for and be approved for an "HSA-qualified" health insurance policy.

2. Then go to a bank or other financial institution and open a Health Savings Account, because you are entitled to do so once you have a qualifying policy.

3. Deposit money into the account whenever you want to, within the allowed limit, and deduct that amount from your Federal taxable income. There is no upper limit on the accumulated balance. See 'HSA Rules' in the box above right.

4. If you want to, pay for qualified medical, dental, vision, chiropractic, and other allowed expenses out of the account. There is no deduction for spending on expenses. Instead, the tax deduction is for the amount deposited, just like an IRA. See 'HSA Rules' in the box above right.

The health insurance plan does not have to cover dental or any of the other allowed expenses in order to pay for them out of the account.


A. You don't need to deposit any money into the account if you do not want to.

B. You don't need to even open an account if you don't want to.

C. The account does not need to be "used in conjunction with" your HSA-qualifying health insurance policy. They have nothing to do with each other, except that you first have to buy the right health insurance policy in order to be eligible to open the account.

D. The health insurance policy is from an insurance company. The account is from a bank or other financial institution. Once established and maintained, they are completely independent of each other.

The policy has features that make you eligible to open an HSA if you want to. The policy is therefore called "HSA-qualified".

However, you might like to have an HSA-qualified policy just because of its features and affordable monthly premium, but don't ever open an account. It's up to you.


Some health insurance policies do not have the required features to be HSA-qualified. If you have one of those policies, you are not eligible for any HSA tax deduction.

A major requirement is that the insurance policy does not have any copayment features, except for preventive care. Instead, it must have an annual deductible and annual out-of-pocket amounts within certain allowed limits.

You cannot open or contribute to a Health Savings Account after the age of 65.

Why Buy HSA-qualified Health Insurance?

1. You like the simple plan design, whether or not you can use the tax deduction.

Under the plan design, you pay all medical expenses each calendar year until the deductible is reached. Depending on plan design, the plan then pays either 100% of covered expenses for the rest of the year, or it pays a percentage and you a pay percentage (coinsurance) until the point is reached that the plan does pay 100% of covered expenses.

For the same maximum annual out-of-pocket maximum amount, the HSA-qualified plan design costs less per month than a plan with copayments.

2. You could benefit from the tax deduction. Itemization on Schedule A of your tax return can not do what a Health Savings Account does. Itemizing for medical, dental, etc. expenses is only for expenses paid that exceed 7.5% of Adjusted Gross Income. The HSA deduction is not for expenses paid but for deposits to the account from the first dollar.

Expenses can be paid for from the HSA account but they then can not be included in itemization. That would not be exact double-dipping, but would amount to the same thing.

3. You can deposit nothing into the account or deposit the maximum allowed or something in between any time you want to.

So you can either

(i) deposit only the amount of the bills you have in hand to pay, i.e., keep no running balance in the account but in effect get a tax deduction for your out-of-pocket expenses for medical, dental, vision, chiropractic and other expenses allowed to be paid for out of the account. The HSA-qualifying medical plan does not have to cover the other allowed account payments like dental and vision, etc.

(ii) use the account as an additional retirement savings vehicle by depositing the maximum allowed each year and don't use it to pay any expenses so as to maximum the tax-free compounding and your retirement savings balance.

(iii) make regular deposits into the account to save money towards the deductible should there ever be the need to pay the deductible.


Leave the money in there even after you are 65 and on Medicare and use it to pay for any qualified expenses you may have to pay for. Maybe none of the money you deposit into the account will ever be taxed.

Further information: HSA or non-HSA?   HSA Rules   HSA Summary   HSA Setup   HSA Banks