Health savings account (HSA)

What is a health savings account (HSA)?

A health savings account, or HSA, is a medical savings account that allows people to set aside money to pay for health care expenses on a pre-tax basis. They are offered as part of a low-cost, high-deductible insurance plan, with the main benefit being that they help people reach their deductible and save on out-of-pocket expenses.

Deeper definition

Every health insurance plan comes with a deductible, which is the amount you have to pay before insurance will pay the rest. Typically, the higher your insurance premium, the lower your deducible, and vice versa. If your plan has a $2,000 deductible, and you get billed $5,000 for a procedure, you pay the first $2,000 and the insurance company covers the remaining $3,000.

Health savings accounts help people with high-deductible plans protect themselves from paying such huge costs. When you have a large, unanticipated medical expense, your insurance might not cover it unless you meet its deductible. If you’ve been paying into a health savings account, you’ll have a bank of tax-free money to pay the deductible. If you’ve already reached your deductible, they can be used to pay other out-of-pocket expenses.

The way it works is you pay a certain amount, called an election, from your paycheck at specified intervals. You can also write a check toward the account, and if you receive your HSA through your employer, they may contribute a percentage as well.

Your high-deductible plan should typically have a corresponding HSA option. If it doesn’t, you can look into getting one from a financial institution. Currently, HSAs cannot be used to pay your premiums unless you receive insurance from COBRA or Medicare. You can, however, use the money in the account to pay for nonmedical expenses if you’re willing to incur a high tax penalty. Although there’s a cap on annual contributions, funds in an HSA roll over each year and, after a certain threshold, they can even be invested in a mutual fund.

You might also consider a CD savings account. Bankrate can help you choose the best one.

HSA example

Nicholas works for a small business whose only health insurance option is a plan with a very high deductible. He takes the plan and opts for its health savings account. He sets his monthly contributions and lets the plan automatically deduct the amount from his paychecks. A few years later, he’s burned by his friend Absalom in a prank gone wrong, and has to go in for surgery. Nicholas is happy to find that his contributions to his HSA have added up over the years and he can fully cover the deductible.