Health Savings Account (HSA) - ByteScout

Health Savings Account (HSA)

The Health Savings Account or HSA provides individuals and businesses access to savings accounts that are tax-advantaged and also created for High-Deductible Healthcare Plan (HDHP). This type of account provides savings to assurers for healthcare expenses that are not covered by the HDHP (an insurance plan with a high periodic deductible).

Health Savings Accounts (HSA)

HSA allows businesses and individuals to contribute money into the account within a yearly maximum cap. All contributions collected are invested in profitable ventures, and the profit is used to finance healthcare services that qualify for payment from the HSA. Healthcare services that are covered include nonprescription medication, dental care, and vision care.

How it Works

Individuals that pay significant levels of deductibles for their healthcare insurance policy would benefit from having an HSA as it would reduce their general costs. Individuals that want to contribute and save costs through HSA must have an HDHP that is HSA enabled. HSA operated in this manner requires an individual to pay a maximum of $6,900 as direct payments. For families, the limit is $13,800.

Individuals are required to pay for their percentage of the cost while the insurance companies pay for the remaining. The HSA helps an individual to lessen the burden of their payment.


Individuals that purchase an HDHP are likely to be eligible for HSA since the two are usually bundled together. Several financial institutions allow individuals to open an HSA without much difficultly. The eligibility of an individual is based on IRS standards. It also does not allow individuals that are enrolled in other insurance plans such as Medicare and dependents to open an HSA.

HSA that an individual owns is funded directly, while the employer and the employee fund accounts owned by the staff. Any member of a family that owns an HSA can also fund the account. Eligible unemployed individuals and freelancers are also allowed to contribute to the HSA.

Merit and Demerit

The most important advantage of the HSA is that it allows individuals, businesses, and families to contribute money into the account from incomes that have not been taxed. The income used to finance the HSA reduces an individual’s taxable income and ultimately reduces their tax obligation. Revenue driven from the investment of untaxed income is not taxable. Any additional contribution to the HSA would attract a tax of 6%.

Only a limited number of individuals can benefit from HSA. Individuals that are healthy and affluent can afford to benefit from HSA due to high deductibles.

Withdrawals from HSA

All withdrawals made from HSA are free from tax if used to finance healthcare expenses. However, if an individual uses the money for other purposes, the money is treated as regular income, hence, taxed.

Healthcare expenses such as dental care, deductibles, vision care, medications, and therapy can all be covered by HSA. However, healthcare insurance premiums are not eligible for HSA funds.

If for any reason, an individual uses the funds within their HSA for other reasons that are not related to healthcare expenses, such withdrawals would be taxed. Additionally, the funds are subject to a 20% penalty to deter such acts. People over 65 years, however, can withdraw funds from HSA without any penalty as they no longer contribute to the account.

Any contributions that are not used within a year by contributors can be used in the next year.