HSA 101: all the HSA questions you have but were afraid to ask

National HSA Awareness Day is a day to share the value HSAs can bring employees. Our goal is to make HSAs simple and no-nonsense. This year, HSA Day features a live podcast recording, two webinars, and other resources to help HR teams understand and communicate the health and financial wellness perks of an HSA to employees. As we get ready for our annual HSA day, we thought we’d share some HSA FAQs with you to get you excited about all things HSA!

The nuts and bolts of an HSA

What is a health savings account (HSA) or HSA plan, and how does it work?

An HSA is a savings account that lets you put money aside before taxes to be used to pay for medical expenses. The way it works is you deposit pre-tax dollars into the account and then you can use this account to pay for deductibles, copayments, coinsurance, and other expenses. Because this cash is deposited into your HSA before being taxed, it helps you lower your overall healthcare costs.

To be eligible for an HSA, there are certain rules surrounding the type of health insurance you carry, including that it be coverage that comes with a high deductible. For 2021 and 2022, the deductible amount required in order to qualify for an HSA is at least $1,400 for an individual and at least $2,800 for a family.

If you contribute to an HSA, consider that that money, while it is in a savings account, is only accessible tax-free if used to purchase eligible health costs. You will pay a penalty if you withdraw money from your HSA for any use other than healthcare costs. There are two penalties involved, the first is a 20% early withdrawal penalty and the second is a requirement to pay income tax on money withdrawn from an HSA for reasons other than for qualified healthcare expenses. Bear in mind that the early withdrawal penalty goes away when you reach the age of 65. After 65, you can take money out of your HSA to use however you please, without paying an early withdrawal penalty. However, if you do spend HSA funds on ineligible expenses, you will have to pay taxes on the purchases.

HSAs are appealing to many because an HSA can significantly lower your tax bill.

How do you contribute to an HSA?

There are three ways you can put money into your HSA:

Payroll deduction (if offered by your employer)
Electronic transfer (from your checking or savings account directly into your HSA account)
Mailing, or bringing a check in by hand to the bank that holds your HSA account

When does an HSA make sense?

Opening an HSA makes sense for people who are generally healthy and are interested in saving up for future healthcare expenses. It’s also a valuable account for anyone who has immediate healthcare savings needs. For example, if you’re out shopping today and need sunscreen or a first-aid kit, you can spend your pre-tax HSA funds to purchase those items. HSAs are also an attractive option for people nearing retirement age because that pre-tax money can be used to pay for medical care after retirement.

Why is an HSA good?

If you’re looking at potentially opening an HSA and are wondering why it would make sense to do so, here are some advantages to consider:

With an HSA you can take control of your healthcare spending and plan how much money to set aside for healthcare costs
You control how your HSA money is spent, and having that kind of control will compel you to shop for care based on quality and cost
While your employer might contribute to your HSA, it’s your account and the money is yours even if you move to a different employer
Any unused money at the end of the year rolls over to the next year and remains your money indefinitely
Money going into your HSA is money you’ve earned and no taxes are taken out of those funds, so you’re getting more from your hard-earned dollars
With some HSAs you’ll earn interest on the money in your account that you are not using for health expenses. Consider having your financial institution invest the money in mutual funds or other financial products, as you dictate
The earnings you make when your HSA funds are invested or are earning interest are also tax-free

How do I determine if an HSA is right for me?

Like most decisions you need to make in life, there are pluses and minuses to opening an HSA. If you’re trying to decide whether or not opening an HSA makes sense for you, there are a few things you will want to consider.

Consider your budget

Do you have wiggle room to tuck away a little bit each month for health costs? If you have a few extra dollars at the end of every month, it would be wise to tuck them away for future use, and one way to do that is by setting up an automatic deposit into an HSA.

Consider your health and that of your family

You’ll also want to take a look at the healthcare you anticipate you and your family will need in the next year. If you’re generally healthy and you want to save for future healthcare expenses, an HSA may be a great way for you to prepare for those expenses. The reason it’s important that you be generally healthy is because there are health insurance requirements to open an HSA which include the need for an account holder to be on a high-deductible health plan (HDHP). If you have high healthcare costs, this type of plan may not make the most sense for you and your family. If you think you might need expensive medical care in the next year and would find it hard to meet a high deductible, an HSA and high-deductible health plan might not be your best option. One reason for this is that when you are part of an HMO and have a copay, you know how much it will cost to visit the doctor. If you opt for an HSA paired with a high-deductible health insurance plan, you might find it difficult to determine the cost of medical care in advance in order to save properly for those expenses.

Consider how close you are to retirement

Another example of an instance where an HSA would be right for you is if you’re nearing retirement. For those near retirement, money saved in an HSA can be used to offset the costs of medical care after retirement. Recent research by Fidelity estimates that a 65-year-old woman retiring in 2021 will spend approximately $157,000 on out-of-pocket medical costs over the course of her retirement. For a man retiring this year that spend is estimated at $143,000. HealthView, a healthcare software company, produced a report predicting that a 65-year-old couple retiring in 2019 would incur $387,644 in cumulative healthcare expenses over the course of their retirement. These figures are daunting, and if you can save pre-tax dollars over the course of your later career to put toward those expenses you will both alleviate the anxiety these numbers might produce while also being smart and efficient with how you manage your money.

What is the average annual HSA contribution for a household?

The average employee contribution to an HSA in 2020 was $2,054. The average annual employer contribution comes out to be approximately $600 for individual employees, and $1,250 for employee family plans annually.

How to open an HSA account

Many of you who choose an HSA will make your enrollment through your employer during open enrollment. At that time, you’ll be able to review what health plans and employee benefits are available to you. To participate in an HSA, you’ll need to enroll in an HSA-eligible HDHP. You could also participate in an HSA that’s not offered through your employer. In those cases, you might consider checking with your health insurance provider to inquire if they partner with HSA institutions.

What are the benefits of an HSA account?

The major benefit to having an HSA is in tax savings. Account Holders can deposit money into their HSA before it is taxed. This money builds up in the savings account, gaining interest, and is there for the express purpose of paying for health expenses. You can use your HSA with those pre-tax dollars to pay for medical and health expenses including doctor visits, hospital stays, surgery, vision care, and dental care. The money can also be used to pay for long-term-care insurance premiums and services, which have become a costly and onerous expense as we live longer and are more apt to need long-term care later in life. The federal government’s pandemic relief program introduced an expansion to the list of eligible HSA expenses, which includes nonprescription medicine like pain relief and allergy pills, and menstrual products like tampons and pads. Check out our interactive eligible expense list.

Why HSA is better than 401k

An HSA has retirement-planning perks that a 401(k) and IRA don’t have when it comes to healthcare costs in retirement.

There are two important distinctions related to healthcare costs when comparing an HSA with a 401(k) and IRA:

Contributions and withdrawals

With an HSA, contributions made through payroll deductions are tax-free. Withdrawals to purchase eligible medical expenses are also tax-free.
With a 401(k), contributions are tax-free, but withdrawals are taxed as any other type of income. Additionally, if they withdraw funds before they turn 59 ½, the funds are subject to a 10 percent early withdrawal penalty.
With an IRA, there are tax implications for either contributions or withdrawals (depending on the type of IRA).

Surprise healthcare costs

HSA participants who are using the account for retirement planning can tap into funds at any time should a need arise. They are only subject to withdrawal penalties if the funds are spent on ineligible expenses.
With a 401(k) or IRA, withdrawals prior to age 59 ½ are generally subject to be included in the account holder’s gross income, plus are subject to a 10 percent penalty.

How is an HSA triple tax advantaged?

“Triple tax advantaged” refers to three ways an HSA removes taxes from the equation. The three valuable tax breaks with an HSA are:

Your money is deposited pre-tax
Your money can grow tax-free
Your money is not taxed when you spend it on eligible expenses

How much did I contribute to my HSA?

The best way to calculate how much you contributed to your HSA is by referring to the IRS form 5498-SA. This form is mailed to you annually, usually in January, by the institution where your HSA is held, commonly referred to as your HSA custodian. This form will give you an accounting of all the contributions made to your HSA for the tax year. These include personal, employer, prior year, and rollover HSA contributions. If you are unable to find this paperwork, simply contact your HSA institution and request a new copy be mailed to you.

How much is in my HSA account?

The best way to determine how much money is in your HSA is by logging into your account to check your account balance. For example, WEX participants can check their HSA balance in their online account or by logging into the benefits mobile app. If you have funds in your HSA’s cash account and investment account, then you’ll have two balances to view.

IRS Form 5498-SA, mailed to you annually, usually in January, will give you an accounting of all the contributions made to your HSA for the tax year. These include personal, employer, prior year, and rollover HSA contributions.

Your HSA account and your job

What happens to the money in my HSA if I quit my job, retire, or leave for other reasons?

If you quit your job, retire, or leave your job for other reasons, your HSA goes with you. Your HSA is yours and will always be yours no matter where you work, and even if you leave the workforce entirely. You keep your HSA and all the money in it when you leave a job, but before you leave, do some research on which financial institution you have your HSA in as some banks extend nominal fees to those no longer enrolled in an HSA through their employment.

If you do find yourself in transition between jobs, one great use for your HSA is using it to pay for long-term care insurance, COBRA premiums, or other health insurance premiums attached to unemployment benefits.

How to transfer your HSA when changing jobs

Here are some things to consider when you are changing jobs and want to transfer your HSA:

If your new employer offers an HSA, take a look at what they’re offering and if it’s a better plan, consider rolling the money from your current HSA into your new employer’s plan.
If your new employer doesn’t offer HSAs, you can easily maintain your current HSA even if it was sponsored by your former employer. One thing to remember is that to be eligible to contribute to an HSA, you need to be enrolled in a high-deductible health plan (HDHP) so when you change jobs make sure you keep that level of health insurance.
If your HSA was fully funded in advance for the whole year and you leave your job and the HDHP in the middle of the year, then you will have to withdraw some of the contribution from the account and pay income tax on the contributions made that extend beyond the time you were insured by an HDHP. You’ll also need to pay taxes on any earnings made from that contribution. You will not incur a penalty fee, however.
If when you leave your job you’re no longer enrolled in an HDHP, you’re ineligible to make contributions to your HSA, but you can still make withdrawals for qualified medical expenses. You can use your HSA funds to pay for eligible medical expenses tax-free for as long as there is money in the account.

Recommendations around contributions to HSA

How much should I contribute to my HSA in my 20s?

If your budget allows you to, you should contribute the maximum amount to your HSA. For 2021, the IRS is allowing individuals to contribute $3,600 to an HSA, and families to contribute $7,200 annually. If you are over the age of 55 years old, you can contribute an additional $1,000 to your HSA annually. Be aware that if your employer is also contributing to your HSA, you will need to factor their contribution when calculating your annual maximum contribution. Any unused funds get rolled over to the following year, and will continue to roll over year after year. There is no penalty for ending the year with funds still in your HSA. That means that your unused contributions will keep accumulating until you need them.

How much should you have in your HSA?

Your HSA can hold more than you will need for health expenses and be used as a cache for future events. HSA consultant, Devenir reported that “HSA investment assets had increased by 32%, to more than $17 billion, in the one-year period through June 2020, and the average HSA balance was more than $15,000.” Any unused funds get rolled over to the following year, and will continue to roll over year after year. There is no penalty for ending the year with funds still in your HSA. That means that your unused contributions will keep accumulating until you need them.

How much should I invest in my HSA?

If your budget allows you to, you should invest the maximum amount to your HSA. For 2021, the IRS is allowing individuals to contribute $3,600 to an HSA, and families to contribute $7,200 annually. If you are over the age of 55 years old, you can contribute an additional $1,000 to your HSA annually. Be aware that if your employer is also contributing to your HSA, you will need to factor their contribution when calculating your annual maximum contribution. Any unused funds get rolled over to the following year, and will continue to roll over year after year. There is no penalty for ending the year with funds still in your HSA. That means that your unused contributions will keep accumulating until you need them.

Fidelity’s tax-deferred growth versus HSAs chart

How much money should I keep in my HSA account?

Recent research by Fidelity estimates that a 65-year-old woman retiring in 2021 will spend approximately $157,000 on out-of-pocket medical costs over the course of her retirement. For a man retiring this year that spend is estimated at $143,000. HealthView, a healthcare software company, produced a report predicting that a 65-year-old couple retiring in 2019 would incur $387,644 in cumulative healthcare expenses over the course of their retirement. These figures are daunting, and if you can save pre-tax dollars over the course of your later career to put towards those expenses you will both alleviate the anxiety these numbers might produce while also being smart and efficient with how you manage your money. Any unused funds get rolled over to the following year, and will continue to roll over year after year. There is no penalty for ending the year with funds still in your HSA. That means that your unused contributions will keep accumulating until you need them.

One thing to be aware of, however, with an HSA is that different beneficiaries to an account face different rules upon inheritance. A spousal beneficiary adopts the account with the same rules as the benefactor. Any other beneficiary would have to pay taxes on the balance of the account. HSA experts recommend that the spouse in that instance try to spend out the account, or leave the balance to a nonprofit organization which would be exempt from paying taxes on the monies.

How much should you have in your HSA at retirement?

How much money to have in your HSA is partially dependent on your overall financial situation. Some choose to use their HSA as a retirement savings account and invest heavily in it. Once at retirement age, the rules on what you can use that money for become less stringent, and certainly for many there will be an increase in medical expenses later in life, making an HSA a great savings tool for retirement. Recent research by Fidelity estimates that a 65-year-old woman retiring in 2021 will spend approximately $157,000 on out-of-pocket medical costs over the course of her retirement. For a man retiring this year that spend is estimated at $143,000. HealthView, a healthcare software company, produced a report predicting that a 65-year-old couple retiring in 2019 would incur $387,644 in cumulative healthcare expenses over the course of their retirement. These figures are daunting, and if you can save pre-tax dollars over the course of your later career to put towards those expenses you will both alleviate the anxiety these numbers might produce while also being smart and efficient with how you manage your money.

One thing to be aware of, however, is what happens to that money after you’re gone. With an HSA, different beneficiaries to an account face different rules upon inheritance. A spousal beneficiary adopts the account with the same rules as the benefactor. Any other beneficiary would have to pay taxes on the balance of the account. HSA experts recommend that the spouse in that instance try to spend out the account, or leave the balance to a nonprofit organization which would be exempt from paying taxes on the monies.

Constraints and rules to having an HSA

How much can a single person contribute to an HSA?

Contribution limits for HSAs are set by the IRS. The current limits are $3,600 per year for an individual and $7,200 per year for a family.

If you’re enrolled in Medicare, you will no longer be able to make contributions to your HSA but in the years leading up to retirement — between ages 55-65 — you’ll have the opportunity to contribute “catch-up” contributions of up to $1,000 over the limits to help pay for medical costs in retirement.

If you contribute more to your health savings account (HSA) than the IRS limit for the tax year this is called an excess contribution and is subject to income tax and a 6% excise tax each year until corrected.

How much money can I put in my HSA account per year?

Contribution limits for HSAs are set by The Internal Revenue Service. The current set limits are $3,600 per year for an individual and $7,200 per year for a family.

If you contribute more to your health savings account (HSA) than the IRS limit for the tax year, this is called an excess contribution and is subject to income tax and a 6% excise tax each year until corrected.

How much am I allowed to contribute to my HSA and how much can I keep in that account?

Contribution limits for HSAs are set by the IRS. The current set limits are $3,600 per year for an individual and $7,200 per year for a family. There is no limit to the amount of money you can keep in your HSA.

To learn more about how you can save and prepare for retirement, use our My HSA Planner tool.

Learn more about WEX’s annual HSA day!

Editorial note: This article was originally published on October 5, 2020, and has been updated for this publication.

Resources:
Bank of America
Healthcare.gov
Morningstar
Devenir
Fidelity
HSA Edge
New York Times
Internal Revenue Service
The Motley Fool
Insider
HSA Store