How Does HSA Work? Health Savings Account-How They Work.

Health Savings Account (HSA) is a consumer-based savings plan which is available to American citizens. It is a funding process with which Americans can make pre-tax income contributions towards investments, savings, and payments for medical expenses which fall outside insurance coverage.

How Does HSA Work?
How Does HSA Work?

How Does an HSA Work?

To access an HSA, a consumer must have been registered under an employer-sponsored High-Deductible Health Plan (HDHP). With this, deductions can be made directly from his/her pre-tax earnings to his HSA. Contributions to the HSA are made within the government stipulated yearly limit.

HDHPs usually have lower monthly premiums. This enables the consumer to channel a large part of his savings into the HSA program. There is also the employer seeding practice where employers make contributions to their employees’ HSA plans.

What Can You Do With HSA Funds?

There are three things you can do with HSA funds.

These are:

  1. You can make payment for medical expenses which are out of insurance coverage.
  2. You can save funds for upcoming medical expenses.
  3. You can opt for investment to earn returns as soon as funds reach the limit set by the HSA custodian

HSA Benefits

The cost of healthcare has been on the increase in the United States over the years and in recent times, a situation that has left many people with the burden of bearing more medical costs than is necessary. Having an HSA plan makes it easier for you to afford and manage these costs through a threefold tax benefit namely:

  1. Tax-free contributions, which make the federal income tax payable by a consumer smaller
  2. Tax-free increase of funds
  3. Tax-free funds withdrawals, allowable for funds expended on medical costs not covered by insurance plans

As an American, you can save as much as 30% of your personal medical expenses with HSA, amounting to $85 billion in pre-tax funds annually. All unspent funds are left as savings in your HSA or used as investments, which is an advantage over other types of tax-free accounts where consumers forfeit all unspent funds at the end of every fiscal year.

Also, HSAs are very helpful in life-after-retirement as they are used to effectively manage healthcare costs. As of 2020, about $295,000 was estimated to cover healthcare costs in retirement in the United States. HSA enables consumers to have long-term pre-tax funds saved up for retirement, just like a 401(k). The difference between these two plans is that while HSA consumers have unrestricted access to their funds, those of 401(k) do not, making HSA an excellent savings plan for unexpected healthcare crises.

Uses of HSA

HSA funds can help you to take care of personal healthcare costs which are not included in your insurance coverage. These include doctors’ appointments, laboratory test fees, treatments, medical apparatus, dental care, eye care, and medications. If you have a HDHP you can easily pay for these expenses using funds from your pre-tax HSAs.

Rules Governing HSA

Consumers are exposed to various savings and payment options through HSA accounts. However, the following rules apply:

  1. All HSA accounts must be harmonized with HSA-qualified HDHP
  2. HSA funds can only be expended on personal healthcare costs which are not included in insurance
  3. As an HAS account owner, you must not exceed the government stipulated maximum savings limit. At present, the limits for individual and family coverage are $3,600 and $7,200 respectively.

HSA Eligibility

The Internal Revenue Service (IRS) requirements for consumers to operate HSAs are as follows:

  1. Consumers must have registered a high deductible health plan (HDHP).
  2. Consumers must not be registered in TRICARE.
  3. Consumers must not at any time be recipients of any non-preventive, non-dental, or non-vision medical benefits from the United States Department of Veterans Affairs or the Indian Health Service concerning treatments that are not service-related disabilities
  4. *Consumers should not have other medical coverage which is non-HDHP in nature such as Medicare, Health Reimbursement Arrangement (HRA), spouse health insurance, and parents’ health insurance, all of which are pre-taxable health expenses.

See Also:


In this article, you have seen the meaning of HAS, The Health Savings Account, how it works, the benefits, how it is funded, uses, rules governing HAS and the eligibility for the Health Savings Account. If you need more information regarding the Health Saving Account (HSA), please leave a comment below in the comment session.

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