Main Street Finance

What is a Health Savings Account?

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A health savings account (HSA) is a tax-advantaged personal savings account that can only be used for qualified healthcare expenses such as paying a medical bill and picking up a prescription. HSAs can help cover any out-of-pocket expenses that people who have a high-deductible health insurance plan (HDHP). HDHPs, which are a requirement for HSAs, have built-in high deductibles (hence the name!) so they aren’t necessarily the best option for some patients.

Contributions to HSAs are not generally subject to federal income tax, and the money that goes into the account is also not taxed. Additionally, unspent money always carries over at the end of the year, so it’s available for future expenses.

How Does a Health Savings Account Work?

Contributions can be made by the individual who owns the account, by an employer, or both simultaneously if the employer decides to match your contribution. The money is either payroll deducted pre-tax or deducted from your income tax on your tax return, and if an employer contributes, the money is not taxed as income for the employee. If you decide to contribute to an HSA, you cannot exceed the government-mandated maximum contribution limit of $3,550 (individual) and $7,100 (family).

The money you deposit into your HSA is yours to withdraw at any time to pay for medical expenses that aren’t paid by your high-deductible health insurance policy or reimbursed by anyone else (so if you have a dental policy that pays part of your dental costs, for example, you can only use your HSA funds to pay the portion of your dental bill that you have to pay out-of-pocket). Expenses may include deductibles, copayments, coinsurance, vision and dental care, and other out-of-pocket medical costs.

Is HSA or PPO Better?

Strictly speaking, an HSA and a Preferred Provider Organization (PPO) aren’t necessarily the same thing. HDHPs and PPO are the general options that employers offer to their employees. But, whether or not an HSA or PPO is better for your situation is up to the individual.

PPO plans are usually associated with less expensive deductibles, but much higher premiums and HDHPs operate under essentially the opposite format. To determine which health insurance plan might be better for you, you need to compare your expected annual health care costs to the amount you save on your premiums. If you expect not to have to go to the doctor much, it may be worth looking into an HDHP. If you do, a PPO may be better for your situation.

Is a Health Savings Account Worth It?

HDHPs and their associated health savings accounts can be a good form of insurance, and for many, it is worth it to have. Again, whether you opt into one depends entirely on your individual situation, so do your research to make the most informed decision.

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