HSA Insurance Plans

The Benefits of HSA Insurance Plans

1. How HSAs Work

A Health Savings Account is a tax-favored savings account combined with an insurance or healthshare plan. HSAs allow you to deposit tax-deductible funds into a savings account that you can use to cover medical costs.

To qualify you must have a high-deductible health insurance plan that qualifies to be partnered with an HSA. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.

4. Premium and Tax Savings

Health Savings Accounts can help you save money on both your insurance premiums and your income taxes. Because HSAs must be paired with a high-deductible health plan and are sometimes paired with health sharing plans, your costs are often much lower than a typical plan.

The savings from the lower monthly costs along with the tax-free deductions could be $10,000 or more every year. Below is an example comparing how much a typical non-HSA plan might cost compared to an HSA plan set up within a health sharing program.

This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $2000 and $550 in expenses for dental care, contacts and eyeglasses.

• Employer contributions are pre-tax, and your own contributions are tax deductible on your federal tax return.
• Interest earned is tax-deferred as long as the money stays in your HSA. 
• Distributions earned are tax-free as long as they are used to pay for qualified medical expenses (see below). 

Note: Not all states allow for a state income tax deduction for HSA contributions. Check our State Tax Treatment of Health Savings Accounts page for more details.

What is an HDHP?

The term HDHP stands for “high deductible health plan.”

These are health insurance products that combine traditional medical coverage with a Health Savings Account (HSA). Individuals and families must be covered under an HDHP to make tax-advantaged contributions to an HSA.

As of 2024, HDHPs are defined under §223(c)(2)(A) as health insurance plans with an annual deductible not less than $1,600 for self-only coverage or $3,200 for family coverage.

Also as of 2024, plan member out-of-pocket costs for HDHPs are capped at $8,050 for individual coverage, or $16,100 for family plans. These out-of-pocket costs include deductibles, copayments, coinsurance, and other amounts, but not premiums. 

These numbers are adjusted each year to account for inflation.

Employers can provide HDHPs as a coverage option in their group health plans. When they do, they can make tax deductible employer contributions to an HSA on behalf of the employee.

Individuals can also purchase an HDHP from a health insurance agent or even via the state Affordable Care Act exchange.

Premiums are much lower compared to standard deductible plans before accounting for the Affordable Care Act subsidy. But because the deductibles are higher, you should have a plan to come up with the cash needed for treatment early in the year, or before you hit your deductible.

That’s where the Health Savings Account can be a powerful tool. 

Can I Use My HSA money for anything other than medical expenses?

You can withdraw money from your health savings account for any reason, at any time you like. But you would have to pay income taxes on your withdrawal. And you’ll also have to pay a 20 percent excise tax penalty on any withdrawals for anything other than qualified medical expenses prior to age 65.

Qualified medical expenses are defined under IRC 213(d). Eligible expenses include, but are not limited to, out-of-pocket costs under your health insurance plan, such deductibles, coinsurance, and copays.

These medical expenses must be primarily for treating or preventing a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins, nutritional supplements, fitness club memberships, or vacations.

Use your HSA to pay for or reimburse yourself for costs you pay for diagnostic services, imaging, lab fees, primary care visits, prescription drugs, physical therapy, durable medical equipment (wheelchairs, lifts, hospital beds, oxygenators, etc.,)

Qualified medical expenses also include many medical expenses that aren’t normally included under your major medical insurance policy at all, such as chiropractic care, some alternative medicine, the cost of transportation to medical appointments, eyeglasses, and hearing aids.

Exception: You generally cannot use your HSA money to pay your medical insurance premiums (unless you’re receiving federal unemployment compensation). But your medical insurance premiums may be a tax-deductible expense, anyway.

Note that while vitamins and nutritional supplements are not eligible if taken for the purpose of maintaining your general health, they would be qualified expenses if prescribed by a health care professional for the purpose of treating or maintaining a specific medical condition. 

For a complete list of qualified medical expenses, see IRS Publication 502

What happens if I don’t need my money for medical expenses?

Your unspent HSA money accumulates year after year, tax deferred. That means there’s no income tax on any interest income or growth in the account.

Once you turn age 65, you can use your unspent HSA money to supplement your income. The usual 20% penalty for spending on anything other than qualified medical expenses goes away. You just have to pay income taxes on your distributions, as you would with a 401(k) or traditional IRA.

This is a powerful fourth tax benefit for HSAs, in addition to the triple tax benefit described above.

For this reason, it may make sense to prioritize funding an HSA over a traditional IRA or unmatched 401(k). 

Do I lose my HSA contributions if I don’t spend them during the year?

No. Health Savings Accounts don’t’ have a “use it or lose it” provision. 

The money in your HSA is yours to keep, whether it’s money that you contributed yourself, or it’s money that your employer contributed on your behalf.

There is another type of employer-funded account, called a Flexible Spending Account (FSA), that does have a “use it or lose it” provision. But that’s not related to the HSA. 

To claim the benefit, you must complete IRS form 8889, and submit it along with your income tax return for the year.

This form lets the IRS know what your total withdrawals and deposits were from your account during the tax year. 

Are there “catch-up contribution” provisions for HSAs for older policyholders? 

Yes. Policyholders who between ages 55 and 65 can make catch-up contributions to HSAs. As of 2024, the catch-up contribution limit is $1,000 per year. (Ref: IRC Section 223(b)(3)(B).

If you are covered by your HSA for the entire year, you can contribute the entire catch-up amount, beginning with the year you turn 55.