How Does a Health Savings Account Work? HSAs Explained

We know what you are probably thinking: is there really another health insurance acronym I need to learn? While the answer to this question is yes,  you don’t need to stress! We’ve answered all the questions you have about health savings accounts (HSAs) so you never again have to ask “how does a health savings account work?”

What Is An HSA?

A health savings account (HSA) is a tax-free savings account specifically for health-related expenses. Put simply, it is a way for you to reserve funds for medical expenses without paying taxes or interest on those dollars. The funds you contribute to your HSA go directly into your bank account before they are taxed making them pre-tax earnings. An HSA is an easy way to make your dollars go further when it comes to medical expenses.

HSAs can only be paired with certain high deductible health plans (HDHPs). If you have an HDHP, an HSA is a great way to reserve funds in case you encounter large medical bills and want to avoid paying taxes on that amount.

An HSA is set up separately from your other bank accounts and allows you to set aside money for medical expenses that you incur after you open the account. One of the great things about an HSA is that any unused funds you have roll over from year-to-year, and these funds can be used for health-related expenses during retirement.

What Can I Use My HSA Funds For?

Funds in your HSA can only be used for "qualified medical expenses.” According to the IRS, medical expenses are defined as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body” and includes “the cost of equipment, supplies, and diagnostic devices needed for those purposes.” Wondering what that means? It is just a fancy way of saying health-related expenses. This includes things like:

  • Doctor visits

  • Prescription Drugs

  • Medical supplies

  • Long-term care costs

  • Chiropractic services

  • Contact lenses

  • Lab tests

  • Dental treatment

  • Hearing aids

  • Psychiatric care

The entire list is pretty extensive, but you can find it here if you want to check if something counts as a qualified medical expense. Be sure to note that these expenses aren’t just medical, but also include dental and vision!

Stride tip: Be careful about using your HSA funds for non-qualified expenses. If you do, you’ll end up paying income tax on the amount used, as well as a penalty tax (of 20 percent!!) for making a non-qualified withdrawal.

Can I Open an HSA with Any Health Plan?

In order to open an HSA, you must have a high deductible health plan (HDHP) that meets that following criteria for 2019:

For an individual plan:

  • $1,350 deductible (or higher)

  • $6,750 out-of-pocket maximum (or less)

For a family plan:

  • $,2700 deductible (or higher)

  • $13,500 out-of-pocket maximum (or less)

Can I Contribute As Much to My HSA As I Want?

Unfortunately, the IRS sets some limits to how much you can save in your HSA. For 2019, these limits are:

  • $3,500 for an individual

  • $7,000 for a family

However, if you are 55 years or older, you are in luck! The IRS lets you add an extra $1,000 to these figures.

Can I Use My HSA Funds on My Spouse and Kids?

You can spend your HSA funds on three groups of people.

1. Yourself and your spouse

2. Any dependents you claim on your tax return

3. Any person you could have claimed as a dependent on your tax return (with a few exceptions)

Even if your spouse and children aren’t actually covered by the insurance plan associated with your HSA, you can still use your HSA funds to cover any of their qualified medical expenses.

Is An HSA Right for Me?

If you have an HSA-qualified HDHP, you should really considering contributing money to an HSA. However, to make it really work for you, you need to be sure to actually contribute funds to the account regularly. An HSA doesn’t provide you with any advantages if you don’t actually put money into it! If you don’t have savings or struggle with saving money, an HSA probably won’t provide you with the benefits you are looking for.

Will An HSA Make Tax Time Even More Complicated?

If you have an HSA, you will have a few tax form obligations. But don’t worry, we’ve got you covered. Stride explains all of the required HSA tax forms here.

Have More Questions About HSAs?

As always, Stride is here to help you understand your health insurance and savings options. If you still aren’t sure how a health savings account works, drop us a line at