What is a Health Savings Account (HSA) and why do I need one?

What is an HSA

A Health Savings Account (HSA) helps you save and pay for certain health care costs. You can contribute money to the account and withdraw it tax free when you use it for qualified medical expenses. If you have an HSA-eligible health plan, you can open an HSA through your employer or set one up directly with a bank, credit union, or other financial institution. As long as you use the funds for qualified out-of-pocket medical expenses, your contributions and withdrawals remain tax free.

 

The HSA contribution limits for 2026 are $4,400 for self-only coverage and $8,750 for family coverage. After age 65, you can withdraw money from your Health Savings Account for any reason. If you use the funds for non-medical expenses, you pay regular income taxes on the withdrawal.

 

How do I use an HSA?

• Save for medical expenses: You set aside money for health care costs, like deductibles, copayments, and coinsurance. It helps save you money and lowers your taxable income and what you might owe when you file taxes.
• Contribute based on your budget: You decide how much to contribute to your HSA based on your budget. There’s no minimum amount. But there’s a yearly limit.
• Possible use for spouse and dependents: You can use your Health Savings Account to pay for qualified medical expenses for your spouse and dependents, even if your Health Savings Account-eligible plan doesn’t cover them.
• After 65 use it for anything you want: Once you turn 65, you can use the money in your HSA for anything you want. If you don’t use it for qualified medical expenses, it counts as income when you file your taxes.
• Stop contributing six months before you retire or get Medicare benefits: But, you can use money left in your Health Savings Account to help pay for certain medical expenses that Medicare doesn’t cover.

 

How does a Health Savings Account work?

The money in your HSA grows tax-free. You can even invest the money that’s in your HSA in stocks, mutual funds, and more. This growth isn’t subject to taxes.

Withdrawals are also tax-free. You can withdraw money from your HSA to use for qualifying medical expenses without paying taxes on the withdrawal amount. After age 65, you can withdraw money from your HSA for any reason. If you use the funds for non-medical expenses, you pay regular income taxes on the withdrawal.

 

The benefits of a Health Savings Account:

• No federal income tax: You aren’t taxed on money you put into it, or on the interest you earn, in a Health Savings Account. You also don’t pay tax on withdrawals for qualified medical expenses.
• Your contribution rolls over to the next year: The amount in your Health Savings Account rolls over year to year and can earn interest, putting more money in your account to cover your health care needs.
• No expiration date on funds: Your Health Savings Account contributions don’t expire. The money stays in the Health Savings Account until you use it.
• Job change doesn’t affect your Health Savings Account: You can keep your Health Savings Account, even if you change employers or retire.

 

How do the funds actually get into my HSA?

You can contribute to your HSA just like you deposit money into a regular savings account, with one key difference: you deduct your HSA contributions from your taxes, or your employer can deposit them for you through pre-tax payroll deductions.

If you get an HSA through your employer you can choose how much you want to contribute. This amount will be taken out of your paycheck through equal payroll deductions automatically.

If your employer doesn’t offer tax-free payroll deductions or you hold a private HSA, you can contribute by writing a check or transferring money electronically.

 

Here’s who can contribute to your Health Savings Account:

• The account holder: If your name is on the HSA, you can contribute to it directly, either from your payroll (before taxes are withheld) if your employer offers this option, or from your personal bank account.
• Employers: Your employer can also make contributions to your account.
• Family members: Other family members, including a spouse, can contribute to your HSA.
• Other people: Anyone else can also contribute to your HSA on your behalf.

 

Can I have an HSA if I’m self-employed?

You can open an HSA only if you have an HSA-eligible high-deductible health plan (HDHP). If you’re self-employed and covered by a qualified plan, you can open and contribute to an HSA.

If you set up an HSA and contribute to it as a sole proprietor, you’ll be able to deduct some of your contributions on your personal income tax return. As long as you make a profit during the tax year, you can file the deduction.

If you work a traditional job, you can often contribute to your HSA with pre-tax dollars. If you’re self-employed, you contribute with after-tax dollars and then claim a line-item deduction on your Schedule C.

 

I’m a small employer, do I need to offer my employees an HSA?

If you’re a small employer with fewer than 50 full time employees, you’re not subject to any mandates. This means that small employers are under no obligation of any kind to provide healthcare insurance to their employees.

But for large and small employers, you need to look beyond requirements, and rather focus on the many benefits of offering an HSA-compatible health plan with an HSA. Just because you don’t have to doesn’t mean you shouldn’t.

Offering an employer-sponsored HSA to your employees is a win-win for both you and your employees. For you as the employer, you’ll benefit from lower payroll taxes, positive upticks in employee satisfaction, leverage points for both employee recruitment and retention and lower health benefits costs. Your employees, in turn, will benefit from lower taxable income, more flexibility and control of their healthcare spending and enhanced long-term savings options.

 

In conclusion

A Health Savings Account is a powerful tool for long-term savings. By maximizing contributions, you can grow your funds tax-free for future healthcare costs. Your HSA can be an essential part of your retirement strategy.

 

Kowalski Financial clients can sleep easy knowing that Small Business Services are also part of the KF comprehensive approach to financial planning and wealth management.