- December 23, 2024
- Posted by General Electric Credit Union
- 4 read
HSA Basics: Tax-Advantaged Savings to Cover Healthcare Costs
A Health Savings Account (HSA) is like a personal savings account you can use to cover the cost of qualified expenses for you and your family. It’s also something that employers can offer as part of a benefits package. From “can you use an HSA for a gym membership” to “is an HSA worth it,” this in-depth guide will answer your top HSA questions.
HSA basics
What is an HSA?
A Health Savings Account, or HSA, is a tax-advantaged medical savings account available to taxpayers who are enrolled in a special health insurance plan called a High-Deductible Health Plan, or HDHP. Established in 2003 as part of the Medicare Prescription Drug Improvement and Modernization Act, HSAs allow those with HDHPs to pay for current healthcare expenses and save for future expenses on a tax-favored basis.
- Compare HSAs to a traditional health plan with our online HSA calculator.
You can contribute funds into your HSA at any time and your contributions are typically tax deductible. If your HSA is set up through your employer, you can opt to set up payroll deductions to contribute to your HSA on a pre-tax basis. An HSA doesn’t have a “use-it-or-lose-it” rule; any unused funds (and potential earnings) in your HSA will roll over each year.
Who can open an HSA?
You can open an HSA if you’re enrolled in a HDHP that meets IRS requirements, whether it's through your employer or opened independently. If you have an HDHP through your employer, you’re not required to use their HSA provider—you can choose one with better features or lower fees, although employer contributions will typically only go to the provider they’ve selected.
To qualify for an HSA, you cannot be enrolled in Medicare or claimed as a dependent on someone else’s tax return. HSA contributions are typically tax-deductible before you turn 65 and become eligible for Medicare. Maxing out contributions, regardless of age, allows you to save for medical expenses now and in retirement while taking advantage of the account’s triple tax benefits.
What are the tax benefits of an HSA?
An HSA is triple-tax advantaged, similar to a 401(k) plan. HSA contributions are tax-deductible, the account balance grows tax-deferred, and you can take funds out tax free to use for qualified medical expenses.
If you’ve asked yourself, can an HSA reduce your gross income? The answer is yes. As we mentioned, payroll deduction contributions are pre-tax, reducing your gross income and, consequently, your federal and state income tax liability.
What are some examples of a qualified medical expense?
- Doctor visits (copays, consultations, and services)
- Prescription medications
- Over-the-counter medications (with a prescription)
- Menstrual care products
- Dental care (cleanings, fillings, and extractions)
- Vision care (eye exams, glasses, and contact lenses)
- Mental health services (therapy or counseling)
- Chiropractic care
- Medical equipment (e.g., crutches, blood pressure monitors, or wheelchairs)
- Hearing aids and batteries
- Physical therapy or rehabilitation services
- Preventive care (vaccinations, screenings, and annual exams)
- Lab work and diagnostic tests
- Prenatal and postnatal care
- Smoking cessation programs and related medications
Unfortunately, there are some expenses that many people assume are eligible for HSA funds but actually are not. Gym memberships, for example, are generally not covered, as they are considered a general wellness expense rather than a medical necessity.
Additionally, over-the-counter vitamins and supplements, cosmetic procedures, and non-prescription skincare products usually fall outside of HSA eligibility unless specifically prescribed by a doctor for a medical condition. Refer to the IRS website to verify if a product or service is covered.
What happens to my HSA balance if I change jobs?
Your HSA is portable, meaning the balance stays with you when you change jobs. You can continue using it for qualified expenses and even transfer it to a new HSA if desired.
Can I lose my HSA funds?
No, HSA funds do not expire. They roll over year-to-year and remain in your account indefinitely.
Other frequently asked questions
Can an HSA help you save more for retirement?
Some accountholders use HSAs to save for healthcare costs, but there’s also the option to save for general retirement costs, too. That’s because after the age of 65, you’re free to withdrawal HSA funds for any reason and won’t have to pay the 20% early withdrawal penalty. However, you will still have to pay income tax on withdrawals.
What is an HSA certificate?
An HSA certificate allows you to save a portion of your HSA funds in a certificate, so you can earn higher interest on your balance while still enjoying the tax advantages of an HSA – with no market risk.
They are offered by some banks and credit unions and come with fixed terms that can range from a few months to multiple years. Choose a term length that works for you, because early withdrawals may result in penalties. They’re best suited for those who don’t anticipate needing immediate access to their HSA funds, making them a good option for retirement savings.
An HSA from General Electric Credit Union can make a great option for anyone interested in limiting their upfront health care costs and saving for future expenses. Before making any decisions regarding your health plan and an HSA, compare your options and review expected costs. As Cincinnati's Best Credit Union, there are many reasons to choose GECU for your HSA–no minimum to open or maintain and no monthly maintenance fee, to name a few! If you live or work in the Tri-State, you’re in our circle and can become a member.