Healthcare costs continue to rise faster than inflation, which creates a conundrum for employers who offer healthcare to their employees. In recent years, most employers have sought to reduce their healthcare expenses by asking employees to shoulder a greater portion of these higher healthcare costs.

Shopping for Healthcare

High-deductible health plans (HDHPs) have become the vehicle of choice for many employers. For the 2024 calendar year, employees who have an HDHP are responsible for the first $1,600 in medical expenses ($3,200 for a family)¹ before coinsurance kicks in (though some plans have higher deductibles). This encourages employees to shop for healthcare in an effort to reduce their out-of-pocket costs. Enrollment in HDHPs reached 55% in 2021, which illustrates how commonplace they’ve become.²

Health savings accounts (HSAs) were created to help employees pay some of their out-of-pocket healthcare expenses. HSAs can be used for dozens of qualified medical expenses ranging from diagnostic services such as x-rays to prescription medicine (see examples below).

Getting an HSA

You’re eligible for an HSA if you’re:

a) enrolled in a high-deductible health plan,
b) not eligible for Medicare, and
c) not eligible to be claimed as a dependent.

You and/or your employer can contribute to an HSA through payroll deductions. If your employer doesn’t offer an HSA, you can open one yourself. Either way, you’ll get a debit card that you can use for copays and prescriptions. Just be aware you’ll pay a 20% penalty if the money is spent on anything other than a qualified medical expense.³

How Do You Contribute?
An HSA generally has two separate functions:

• As an FDIC-insured personal savings account, or
• As an investment account for HSA assets

The IRS limits the amount of pre-tax dollars that can be contributed to an HSA each year. In 2024, the maximum is $4,150 for individuals and $8,300 for families.⁴

In addition, anyone 55 or older can contribute an additional $1,000 catch-up amount. Those approaching retirement can max out their contributions and then invest to build a health-expense nest egg (FIGURE 1).

What Are the Benefits?

The main advantages of HSAs are the tax benefits:

• Salary deferrals and employer contributions to HSAs are pre-tax 
• The investment earnings on HSAs accumulate tax-free
• Assets can be withdrawn tax-free for qualified medical expenses
• After-tax contributions (not made via salary deferral) are tax deductible

If you know you have a big out-of-pocket medical expense on the horizon, you can add funds (up to your limit) into your HSA. 

Some employers make contributions to HSAs on behalf of their employees. That amount varies from company to company. Other factors, including whether it’s solely for the employee or for the employee plus additional family members, can play a part, too.

It’s Not an FSA

An HSA is different than a flexible spending account (FSA). Both allow you to put aside money for healthcare costs, but there are no eligibility requirements for FSAs. The biggest difference is FSAs are “use it or lose it”: Contributions to a FSA must be spent by the end of the calendar year or they’re forfeited. HSAs, however, carry over year after year. If you have an HSA, you’re not permitted to have a FSA, in most instances. 

You Own Your HSA Forever

If you leave your current job, you can take your HSA along with you. It’s your money, which is part of what makes HSAs an attractive way to save for healthcare expenses in retirement. Your HSA will always be there for you.

Going Deeper With HSAs

Understanding the ins and outs of this additional healthcare tool might help you more easily tackle your out-of-pocket spending. Visit HealthCare.gov and IRS.gov for more details on eligibility and limits today. 

¹ Source: HealthCare.gov, 2022
² Source: “Rate of Workers Enrolled in High-Deductible Health Plans Jumps for 8th Year in Row to Record 55.7%,” ValuePenguin. As of 2021, most recent data available. 
³ Source: IRS Publication 969: “Health Savings Accounts and Other Tax-Favored Plans”
⁴ Source: IRS.gov

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