The ABCs of HSAs


If I could give an award to any one account type it would be the Health Savings Account (HSA). Both contributions and growth are tax free if funds are used for qualified medical expenses. In addition, at age 65, funds may be used for non-medical expenses penalty free. No other type of account offers such flexible tax planning opportunities.

Even for the (now) young and healthy, HSAs can be a lifesaver. While I worked for a major company, I had relatively inexpensive health insurance, dental and vision premiums. I’d never had a major illness, but I still put aside some money in my HSA each year. When I quit my job to open my firm, I had to purchase a separate health insurance policy. My new policy premiums and deductible were 5x the amount of my old policy. I knew I couldn’t use the funds in my HSA to pay for the premiums, but I could use the account to cover any co-pays, my semi-annual dental exams, and any other unplanned health, dental or vision-related costs.

When it rains, it pours! For the first time in my life I had a major medical scare, ended up purchasing glasses that were not fully covered by my vision insurance, and had to have dental work done. Luckily, I was able to use my HSA to cover these expenditures.


Reduce your taxable income in the year of contribution


Grow your money tax-deferred


If used for qualified medical expenses

HSA Basics


The easiest way to open an HSA account is to enroll when you sign up for insurance coverage. However, if your insurance company does not give you the option, or if you want more flexibility in your options, you can enroll in a private HSA, as long as you meet certain criteria:

  • Enrolled in a high-deductible health plan (HDHP)

  • No other health insurance coverage

  • Not be able to be claimed as a dependent on another taxpayer’s return (whether actually claimed or not)

  • Not enrolled in Medicare (but can enroll in an HSA prior to obtaining Medicare coverage)


Once you set up your account, you can start contributing money right away. If your employer sponsors the plan, the easiest way to do so is through payroll deductions. Since this money is deducted pre-tax, the wages shown on your W2 have already been reduced and you don’t need to make any adjustments when you file your taxes.

If you are self-employed or have a non-employer sponsored plan, you can contribute manually, or begin a recurring auto-draft from your bank account. Since you paid taxes on this money before moving it to the HSA, you will deduct the payment on your 1040 form.


After you fund your account you can start using it for qualified medical expenses. These include copays, purchase of prescription drugs (or over-the-counter drugs prescribed by a doctor), vision exam and glasses, dental expenses, medical equipment, etc.

You can even use your HSA for certain insurance premiums:

  • Long-term care insurance

  • Health continuation coverage such as COBRA

  • Medical insurance premiums only while receiving unemployment compensation

  • Medicare premiums (but not Medigap or other supplemental coverage)

Many HSAs now come with a debit card. Most will prevent you from making unauthorized purchases, but double check that you haven’t accidentally used your HSA funds for non-qualified expenses. The IRS subjects any non-qualified purchases to regular income tax treatment (if funds were contributed pre-tax) and a 20% penalty, unless you are 65 or older.

Alternatively, you can make a purchase then request a reimbursement from your plan. Some administrators require you to submit a receipt for verification, but ultimately you are responsible to make sure you haven’t reimbursed yourself for a non-qualified expense.

You cannot reimburse yourself for any expenses incurred before your HSA account was created. However, you can still itemize these costs (and any others that haven’t been paid using insurance or pre-tax funds) on your Schedule A.


HSAs can be a great tool to reduce your tax liability and cover the healthcare costs that most of us are bound to incur. For assistance or questions, please contact us or check out our services and pricing page to get started with the financial planning process.

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