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  • Health saving accounts allow people to put away tax-free money towards future health care
  • Funds in your HSA should only be used for medically related expenses
  • You cannot purchase over-the-medication with funds from your health savings account


Due to the rising cost of healthcare with higher deductibles, co-pays, and lower insurance percentage payments, many people are opting to open a healthcare savings account (HSA).

The HSA is a special type of savings account that allows people to put aside money for healthcare-related expenses.

In order to open an HSA, you must have health insurance plan with a high-deductible (HDHP). The purpose of the account is to help you meet your deductibles and other expenses not covered by your insurance plan.

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How are health savings accounts different from other savings plans?


HSAs are different from other healthcare savings plans. A healthcare savings account is individually owned, unlike a health reimbursement arrangement (HRA), which is owned by the company for which you work.

HRAs are usually paired with employer healthcare plans as part of a total benefits package, while anyone can open an HSA.

HSAs cannot be used for all medical-related expenses. As of 2011, medications sold over-the-counter (OTCs) cannot be purchased with HSA funds.

However, if your doctor writes a prescription for the medication, it’s considered non-OTC, so even if you purchase the OTC brand, and can be purchased with HSA funds.

Can I withdraw money from an HSA?

If you attempt to withdraw funds from your HSA for non-approved expenses, the tax situation changes, similar to when you make early withdrawals from an IRA.

Not only can the money now be taxed, but there can be penalties incurred for the withdrawal. It is important to accurately budget your deposits into an HSA.

Because these funds are designated for that purpose and cannot be used for anything else, they are subject to tax. Because of this, you may actually bring your total taxable income into a lower tax bracket.

How much money can I deposit in a healthcare saving account?


The deposit limits for 2011 are $3.050 for individuals and $6,150 for families. Limit increases are allowed for individuals over 55 years of age who have not previously had an HSA.

According to the new  Healthcare Act, there will be a one-time rollover of up to the yearly limit allowed from an IRA without tax consequences.

Funds can be transferred from one account to another, but you cannot transfer them into an IRA.

As of 2011, all states except Alabama, California, and New Jersey comply with the federal regulations on HSAs. These states also have state income taxes, and treat HSAs differently than the federal government when it comes to tax assessment.

Why were healthcare savings accounts created?

HSAs were designed to replace medical savings accounts (MSAs). In 2008, over 4 million Americans were enrolled in healthcare savings account plans sponsored by employers, and over an additional one million had individual plans.

The number has been steadily increasing since the passage of the bill. Apparently, many people found HSAs a good way to budget for medical expenses, and enjoyed the tax advantages of these accounts.

There are people both for and against the HSA system.The people supporting the concept point to a Blue Cross and Blue Shield survey of 2005, which indicates overall customer satisfaction with HSAs.

However,  those who are against HSAs point claim that HSAs do not benefit the poor, who are most likely to be uninsured.  

As low-income people are far less likely to have HSAs, they tend to be much more vulnerable to unexpected medical expenses. While the future of HSAs may be in question, right now they are a good way to save tax money and budget for medical expenses.

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[su_spoiler title=”References:” icon=”caret-square” style=”fancy” open=”yes”]

  1. https://en.wikipedia.org/wiki/Health_savings_account
  2. http://www.fda.gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/UnderstandingOver-the-CounterMedicines/
  3. https://www.irs.gov/affordable-care-act
  4. https://www.treasury.gov/resource-center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx
  5. https://en.wikipedia.org/wiki/Medical_savings_account_(United_States)
  6. http://www.nolo.com/legal-encyclopedia/types-of-medical-expense-accounts-29522.html