HSA Basics
HSA Basics: What It Is and Why It’s Not “Use It or Lose It”
Health Savings Accounts get confused with Flexible Spending Accounts more often than almost any other benefit, and that confusion costs people real money every year. If you’ve ever rushed to spend down an account before December 31 out of fear you’d lose it, this article is for you.
What an HSA Actually Is
A Health Savings Account is a tax-advantaged savings account available to anyone enrolled in a qualifying high-deductible health plan (HDHP). Money goes in pre-tax, grows tax-free, and comes out tax-free as long as it’s used for qualified medical expenses. That’s three separate tax advantages in one account, which is more favorable treatment than almost any other type of account, including most retirement accounts.
An FSA (Flexible Spending Account) typically must be spent within the plan year or a short grace period, or the funds are forfeited. That’s where “use it or lose it” comes from. An HSA has no such deadline. Unused funds simply roll over, year after year, for as long as you have the account.
The Money Is Yours, Permanently
Your HSA doesn’t belong to your employer or your insurance plan. It’s yours. If you change jobs, change health plans, or retire, the account and everything in it comes with you. There’s no forfeiture, no deadline, and no requirement to spend it by a certain date.
It Can Function Like a Second Retirement Account
Once you understand there’s no spending deadline, a different strategy opens up: contribute to your HSA, invest the balance once it’s above your plan’s cash threshold (many providers allow this), and pay for smaller medical expenses out of pocket now while letting the account grow for decades. After age 65, HSA funds can be withdrawn for any purpose without penalty, though non-medical withdrawals are taxed as income at that point, similar to a traditional IRA. Withdrawals for qualified medical expenses remain tax-free at any age.
A client had been draining his HSA down to a few dollars every December, assuming it worked like the FSA he’d had at a previous job. Once he learned the balance would simply carry forward, he restructured his contributions and let the account build for the first time in years. He described it as finding money he didn’t know he already had.
What Counts as a Qualified Expense
- Doctor visits, copays, and coinsurance
- Prescription medications
- Dental and vision care, including glasses and contacts
- Many over-the-counter items and menstrual care products
- Certain premiums, including COBRA and long-term care insurance
Who Can Contribute
Eligibility is tied to being enrolled in an HSA-qualified high-deductible health plan and not being enrolled in Medicare or claimed as a dependent on someone else’s taxes. Contribution limits are set annually by the IRS and adjust for self-only versus family coverage, with an additional catch-up amount available at age 55 and older.
If you’re currently on an HDHP and not contributing to an HSA, or you’ve been rushing to spend it down each year, this is worth a second look. It’s one of the few places in the tax code built entirely in your favor.
Amy Nielsen
Licensed Insurance Broker
amy@lifestyle-advisors.com · www.lifestyle-advisors.com · (952) 210-9456
MNSure Assister #5503492
