What is an HSA and how does it work?
A Health Savings Account (HSA) is a tax-advantaged bank account used specifically for health-related expenses. Basically, it’s a way to reserve funds for a time when you might have high medical costs and want to avoid paying taxes on earnings and interest on those funds.
This account is set up separately from your other finances, and allows you to set aside funds with the intention of using them for medical expenses incurred after the initiation of your HSA. Funds in this account roll over year-to-year if you don’t use them, and can be invested in the meantime to build more savings.
It is important to remember that these accounts can only be used for "qualified medical expenses". This includes things like doctor visits, prescription drugs, medical supplies or other expenses you incur to pursue a treatment plan recommended by your doctor. If you use your HSA funds for non-qualified expenses (think non-medical), you will generally pay income tax on the amount used, plus get hit with an additional penalty tax for making a non-qualified withdrawal.
Requirements to be enrolled in an HSA: For 2017, you must be enrolled in a plan with an individual deductible of more than $1,300 and an individual out-of-pocket maximum of less than $6,550. We call this a “High Deductible Health Plan”, or HDHP. For family plans, your deductible must be more than $2,600 and your out-of-pocket maximum less than $13,100.