What Is a Health Savings Account?

We all need health insurance with great coverage, but we also want to save money. The challenge lies in getting both. With a health savings account, you can minimize your expenses while still ensuring your financial security. Health savings accounts, or HSAs, are typically used in conjunction with a high-deductible healthcare plan. Their purpose is to help people save for medical expenses tax-free. 

An independent insurance agent can help you get set up with health insurance and a health savings account. They'll help you review your healthcare options to make the best choice. But first, here's a guide to health savings accounts, how they work, and why you might want one. 

How Does an HSA Account Work?

An HSA account works like a medical savings account. You combine a high-deductible health plan (HDHP) policy with an HSA bank account, both of which help pay for healthcare. 

Until your HDHP deductible is reached, you can use your HSA account to cover expenses like co-pays and health care costs. Some HSA insurance plans provide full coverage for preventive care without requiring you to meet deductible requirements.

Health savings accounts cannot be supplemental insurance. This also means that you cannot participate in Medicare or be claimed as a dependent. You can also only use your health savings to pay for qualified medical expenses, which are determined by your insurer.

HSA Account Benefits

One of the biggest advantages of utilizing a federal health savings account is the tax-free status it provides. Contributions that you and your employer make are excluded from your gross income, and your savings are allowed to grow tax-free. Qualified medical expenses are also tax-free, and you can claim them as deductions on your tax return.

Because of this tax-exempt status, there are certain regulations that limit contributions and deductible amounts, as well as out-of-pocket limits. Out-of-pocket expenses do not include the amount you pay in premiums.

HSAs also offer the benefit of being portable, meaning you can keep your account even if you change jobs. These accounts also offer long-term growth potential and investment opportunities. 

Understanding HSA Funds

Your HSA account acts as a healthcare savings account, which you can deposit into and withdraw from, as needed. Not only do you get to take advantage of the tax-exempt status, but the money rolls over from year to year. 

Any money left in the account gains tax-free interest. If you don’t use all your funds, there’s nothing to worry about. At 65, you can use your HSA funds for anything you want, and the distribution will not be subject to tax.

Who Needs an HSA Account?

If you have low healthcare costs and rarely visit the doctor, HDHP/HSA insurance plans may work well for you. You can choose the amount of money that you contribute to your HSA account, and some employers will match this. The flexibility of contribution levels and low premiums make an HDHP/HSA insurance plan an affordable healthcare option for many.

However, an HSA account isn’t for everyone, and you should assess your healthcare needs before you invest in one. If you have regular out-of-pocket medical expenses and they are costly, a health savings account may not be for you. 

Meeting the high deductible may also keep you from contributing the maximum amount to your HSA account, which minimizes the benefits. If you’re still unsure whether an HSA account is right for you, an independent insurance agent can help you decide.

How to Open an HSA Account

Fortunately, opening your HSA doesn't have to be difficult. Here's a step-by-step guide to opening an HSA account.

1. Determine your eligibility: First, enroll in an HSA-eligible health plan that meets the requirements for an HDHP. 
2. Choose your HSA provider: It's helpful to research several options for HSA providers before making your choice. For example, some HSA providers require a low amount, or even none, of your HSA amount to remain uninvested in cash, which can be the right option for people looking to invest their accounts. 
3. Invest your HSA: It's now time to set up your HSA investments to help you save for qualifying long-term medical expenses. 

Your financial advisor or independent insurance agent can help you open and set up an HSA account. An independent insurance agent can also help recommend the best HSA providers near you. You can also open an HSA online. 

HSA Contribution Limits and Rules for 2025

Here's an overview of this year's HSA rules and contribution limits.

HSA contribution limits 2025

HDHP minimum deductibles 2025

HDHP out-of-pocket maximums 2025

What Happens If You Overcontribute to an HSA?

HSA rules for 2025 dictate that if you overcontribute to your account and surpass your maximum annual contribution limit, you'll be charged a 6% excise tax on the excess contributions and any money you make from them. You also won't get a tax deduction for your excess contributions, and they will be included on your W-2 as taxable income. 

Qualified vs. Non-Qualified HSA Expenses

It's important to understand what counts as a qualified HSA expense and what's considered non-qualified. This can help you avoid paying penalties if you charge a non-qualified expense to your HSA account. Review the following HSA medical expenses list when asking, "What can I use for HSA?"

HSA qualified expenses

1. Common or routine medical expenses (e.g., annual exams, crutches, flu shots, hearing aids, prescription medications, wheelchairs, and X-rays)
2. COVID personal protective equipment (PPE) supplies (e.g., masks and hand sanitizer)
3. Menstrual products and OTC medications (e.g., pads, tampons, liners, and Advil)
4. Family-planning products (e.g., birth control pills, condoms, tubal ligations, and vasectomies)
5. Emergency medical expenses (e.g., ambulance services, hospital visits, and MRIs)

Non-qualified HSA expenses

1. Personal hygiene items (e.g., toothpaste and deodorant)
2. Vitamins, herbal supplements, and nutritional supplements for general health
3. Weight-loss programs for general health

Keep in mind that these lists are not exhaustive, and there may be exceptions in either category. Review the specifics of your HSA account to be certain of what counts as a qualified or non-qualified expense. 

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HSA vs. FSA: What's the Difference?

HSAs differ from FSAs, which are flexible spending accounts, in that an FSA does not allow members to keep their unused money, and funds can be forfeited back to their employer. Both types of accounts allow people to use pre-tax money to pay for qualified or eligible medical expenses. HSAs also differ from FSAs because an HDHP is required to open an HSA, whereas FSAs can be paired with traditional health plans. 

How to Use Your HSA Effectively

There are a few HSA strategies to follow to use your funds effectively. You can maximize your HSA benefits by saving all receipts, tracking expenses, and investing your HSA funds. A smart long-term strategy can involve using your HSA for retirement healthcare costs. An independent insurance agent or financial planner can further advise you on how to use an HSA for retirement or how to maximize your HSA benefits overall. 

Here's How an Independent Insurance Agent Can Help

When you're ready to start financially planning for healthcare expenses, no one's better equipped to help than a local independent insurance agent. These agents have access to multiple insurance companies, so they're free to shop and compare health insurance policies and quotes for you to find the best deal. 

Your agent can also help you pair your health plan with an HSA or FSA account to maximize your funds and savings. They'll walk you through all your options to find the strategy that works best.