Health Savings Account (HSA) Basics

What is a Health Savings Account?

Health savings accounts (HSAs) allow individuals to save money for health care expenses on a tax-deferred and tax-free basis. This law was signed into law on December 8, 2003 and became effective on January 1, 2004. The tax deferred money can be invested into mutual funds, stocks, cash or bonds and can earn interest. The money can only be used for medical expenses otherwise taxes and a possible penalty may apply. Individuals with high deductible health insurance plans are eligible to open a health savings account. High deductible insurance typically require $1,000 or more in out of pocket expenses before it can qualify as such.

In 2003, health savings accounts were introduced as a part of a “consumer directed health care” initiative. The government encouraged these programs as a means to control health care costs. Health care companies and the government assumed that physicians would have an incentive to lower their health care costs if the physicians had to compete for a patient’s business. Consumers would also demand better care if they were spending their own money as opposed to a company’s or insurance company’s money. How well this has worked is obviously up for debate.

Individuals who are generally healthy will typically benefit from investing in a health savings account as it’s an effective way to pay for routine doctor visits, prescriptions, and procedures. However, individuals who may need immediate health care should assess whether or not they can afford their deductible and weigh the options. If you have a possible need for an expensive procedure in the next few years it may be far cheaper to pay the high deductible instead of putting money aside in savings that may not cover everything and have little time to reap the tax benefits.

How Does a Health Savings Account Work?

Funds deposited into a health savings account will continue to accumulate tax-deferred from year to year if they are not spent. A lot of people mistakenly assume these accounts are “use it or lose it” but that actually applies to Flexible Spending Accounts, or FSAs. The funds accumulated in the account are the individual’s and are not owned by your insurance provider. The funds may generally be withdrawn at any time, but in order to withdraw the funds without paying taxes on the gains or be assessed a 10% penalty they must be used for a qualified medical expense. Qualified medical expenses include:

  • Insurance Deductibles
  • Co-Payments
  • Dental
  • Vision
  • Chiropractic Care
  • Eyeglasses
  • Hearing Aids
  • Some Cover Mammograms
  • Prostate Exams
  • Colon Cancer Screenings
  • Pap Tests
  • Well Baby Care
  • Annual Physicals
  • Medical Transportation Expenses
  • Non-prescription Medications, until 2011

However, beginning in 2011 over the counter medical expenses will not be covered. If the individuals need to withdraw the money for non-medical expenses, then those funds will incur penalties. You should refer to the guidelines to determine the exact penalties associated with non-medical expense withdrawal.

Each year consumers may contribute up to a maximum amount to the health savings account. Depending upon the person’s familial status, the amount varies. The maximum amounts are listed below:

• Individual with Self Coverage (2010): $3,050
• Individual with Family Coverage (2010): $6,150
• Catch Up Contributions for Age 50+ (2010): $1,000

Other than the maximum contribution, individuals can contribute as little as desired. You  also can decide which company will manage the account and subsequently choose what type of investments to make with the money in the account.

According to America’s Health Insurance Plans (AHIP), as of January 2009, nearly 8 million people were covered by the health savings account. Most were covered under a group plan which comprised 6.2 million of the people enrolled. Nearly, 1.8 million people are covered by individual policies. That number has increased since 2008 when only 6.1 million were covered under this type of program.

Statistics show that on average most people withdraw half of what they put into their HSA each year. For instance, if the average annual deposit was $2,100, then the average withdrawal was approximately $1,000. Individuals can withdraw from the account in a variety of ways. Some health savings account providers allow the contributor to have a debit card to withdraw funds. Other health savings accounts provide checks for contributors to withdraw funds. And some will allow you to make payments on your own and submit for a reimbursement.

The process will depend upon the provider you select which means it’s important to choose the right provider for your needs. The checks or debits can be made payable to anyone. However, those checks may incur a 10 percent penalty along with income taxes if it’s determined the payment was not for a qualified medical expense. Therefore, make certain to plan accordingly to avoid penalties and taxes. If the person is over the age of 65 or disabled at the time of withdrawal, then the 10 percent penalty may be waived.

Who Can Establish a Health Savings Account?

To qualify for a health savings account individuals must be under the age of 65 and possess a high deductible health insurance plan. If there is a spouse covered on the insurance, both must fall under the high deductible. Furthermore, each individual can only be covered by the high deductible health insurance without having a secondary provider. However, the covered  can possess vision, dental, disability, and long term care insurance in addition to the high deductible health insurance plan which are not typically covered under regular health insurance plans.

According to one study, 46 percent of the health savings account holders were from a lower to middle income community with a median income between $25,000 and $50,000. Thirty-four percent of the individuals lived in middle income neighborhoods between $50,000 and $75,000. Twelve percent lived in an upper income neighborhood with a median income of $75,000 to $100,000. Three percent and five percent represent the lowest income neighborhoods and highest income neighborhoods, respectively. The low income neighborhoods represent median incomes below $25,000, and high income neighborhoods represent people with median incomes above $100,000.

Where Can You Set up a Health Savings Account?

Some employers offer health savings accounts to their employees so that is a good place to start. Employers may allow employees to contribute to a health savings account before their income is taxed as it comes right out of your paycheck. Some employers may even match what the employee contributes or fund the entire health savings account for the employee. Since each plan offered at the employer level is different you will want to check with your own employer to get the details.

For those who sign up for an independent health savings account through an insurer or bank, then the contributions made annually may be filed as a deductible expense on your taxes. Many of the insurers that offer health savings accounts are available on eHealthInsurance. Other options may be available by contacting the National Association of Health Underwriters. Some examples of health insurance companies that offer health savings account are listed below:

  • Aetna
  • Coventry
  • United Healthcare
  • AARP
  • Anthem Blue Cross Blue Shield
  • Cigna
  • Kaiser Permanente
  • PreferredOne
  • Providence Health Care
  • Rocky Mountain Health Plans

As of 2006, over 600 banks were also offering health savings accounts to individuals and to companies. Even more banks are offering this feature today, so another safe bet may be to check with your own local bank and see if they have an HSA plan available.


Some people  are obviously hesitant about this particular savings plan compared to traditional health insurance. However, this plan gives you much more control over your money. With an HAS you have the ability to take some money out of your insurer’s hands and control how much you set aside, where you save that money and what kind of interest it receives, and then choose how to spend it. All while receiving tax benefits for doing so.

At the same time, these plans aren’t for everyone. Your specific health coverage, deductible amount, and health care needs will ultimately dictate which plan is right for you. You’ll have to take a look at all of the variables in your situation and determine if an HAS is able to save you money or not.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.


Jeremy, Thanks for the very informative post! I have a question. Can you tell me where I can find an answer to that? I currently have an HSA with my employer. But I am probably going to leave my employer before the year end. Can I self-fund the HSA account to the max amount right now, up-front? And, if I do that, and I end up staying with my employer through year end, can I simply cancel my contributions that are currently made from my pay? I am just trying to max out my account ASAP just in case I lose my job soon or choose to leave it. Thanks!


Health Savings Accounts, if properly marketed, can be immensely profitable to hsa providers.

Even though their average commissions are small, they could easily compensate in increased volume.

Also, with the passage of the Patient Protection and Affordable Care Act in 2010, hsas will be very appealing.

This is because of the mandatory coverage requirement for all. Since hsas have such low premiums, an health savings account which grows tax free, they will be very appealing.


What happens if you are terminated or leave to get another job? Are you obligated to pay back the employer?

Jia Tyan Hu
Jia Tyan Hu

I've has HSA for 4 yrs and I've been pretty happy with it because I don't have to and don't like to deal with the insurance company as much. However, I am sad to see that non-prescription medications are no longer covered in the future...I don't understand why they changed the program. *Sigh*



Health Savings Accounts (HSA) provide an excellent way to place "extra" monies in tax-deferred accounts especially for those retired thus not eligible for monies to be deposited in IRAs/401Ks. HSA monies do not have to be used in any designated year. Instead monies can continue to grow & later be used toward payment of needed medical expenses,hospital deductibles, long term care, etc. In essence, money will be available for unanticipated future needs.

Do shop around for the best interest rates: Ex: Past account maintenance fees were so high, my small account was gaining only $.25 per month. Moving to a credit union, I now earn $5.25+ per month.

ENSURE ALL RECEIPTS ARE RETAINED TO SUPPORT USAGE ONLY FOR MEDICAL EXPENSES. Truly a wonderful savings vehicle for those having monies available to invest!

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One of the issues employers face is that the average employer has done a poor job of educating employees about the cost and the value of their benefits. So, the introduction of an HSA is scary to employees.


Valerie, there are more people starting to see the value of this approach and doing just that. As a younger generation that has quite a few years until those hefty medical expenses kick in closer to retirement putting away a few dollars each year right now with special tax treatment can pay off down the road.

So you're exactly right. You can set up an HSA now and just let the money sit and grow. There's no requirement to use it right away and you could opt to wait until you're retired to help pick up the tab of what Medicare doesn't cover. That is, of course assuming there are no major changes to the accounts in the future, but regardless it is still your money and the only thing that could change is they either stop allowing you to contribute going forward or change which medical expenses qualify.

And like your other types of retirement accounts you can assign beneficiaries. This is especially helpful if you're married because generally speaking, if something happens to you and you had the HSA, your spouse can elect to take ownership of it and continue to receive the tax benefits of the account for their own medical expenses.

They don't get a lot of coverage in the media, but these accounts can be particularly helpful if you're thinking about how high medical costs might be in the future. In addition, once you hit 65 you can take money out of the HSA and not have to worry about the 10% penalty, so worst case scenario is you are healthy and wealthy when you retire and if you cash out the HSA the distributions just get taxed as ordinary income the same as a traditional IRA or 401k distribution would be.


Great post! I knew that both accounts were tax-deferred, but I always thought that the only difference between HSA and FSA was the "use it or lose it" characteristic of FSAs. I never thought of HSAs as a vehicle for growing savings. When does an HSA need to be used? Could I set up an HSA now to save for medical costs in retirement? It seems like this would be a great way to increase the amount money available to us generation-xers after we quit our day jobs. I imagine that a lot of the money I have been putting away in my Roth and 403b will be used for medical expenses. If an individual passes away before using all of the funds, woud they be forfeited?