Smiling Pleasant LadyIt’s no secret that health care costs have been skyrocketing for many years and that the rapid rate of increase is affecting everyone. It’s estimated that a couple retiring today at age 65 will need $200,000 to cover health care expenses in retirement. 

That means saving for health care should be an important part of retirement planning.

There is an approach that can help you better plan for and meet these rising costs— enrollment in an HSA-eligible health plan (also known as a High-Deductible Health Plan [HDHP]) and an HSA. This combination can potentially save you money on health care while giving you more control over how your medical dollars are spent.

To help you better understand HSA-eligible health plans, HSAs, and how the two work together, here are answers to some commonly asked questions to help you get started.

What is an HSA-eligible health plan?

An HSA-eligible health plan is an HDHP that satisfies certain IRS requirements with respect to deductibles and out-of-pocket expenses. You generally pay more up front for medical expenses before the plan begins to pay for covered services. In return, you will generally pay less in premiums than in other medical plan options. Otherwise, an HSA-eligible health plan is much like a traditional health care plan. Enrollment in an HSA-eligible health plan is one of the requirements to be eligible to establish an HSA.

What is an HSA? – A Health Savings Account (HSA) is an individual account used in conjunction with an HSA-eligible health plan to cover out-of-pocket qualified medical expenses on a tax-advantaged basis. Your HSA belongs entirely to you and can be used to pay for both current and future qualified medical expenses for you and your eligible dependents. You can contribute to your account, withdraw contributions to pay for current qualified medical expenses, and potentially grow your account on a tax-free basis by investing your savings in a wide array of investment options.

Why should you consider an HSA? – If you have the opportunity to enroll in an HSA-eligible health plan with an HSA, you may want to take a closer look. This combination may offer some significant tax and savings advantages over traditional health care plan options—no matter if you’re a low, medium, or high user of health care services.

Control. You determine how much to contribute (up to your maximum annual contribution limit per IRS rules), when and how to invest your contributions, and whether to take an HSA distribution to pay for current qualified medical expenses, or let your contributions stay invested for future growth potential.

Tax savings. When used for qualified medical expenses, HSAs offer a triple tax savings—contributions, any investment earnings, and distributions are federal tax free.

Growth potential. You have the opportunity to invest your contributions in a wide array of investment options—including stocks, bonds, and mutual funds—for potential growth of your account over time.

Flexibility. Any unused balance in your account will automatically carry over from year to year so you can begin to build your savings for future qualified medical expenses.

Portability. Your HSA always belongs to you, even if you change jobs or become unemployed, change your medical coverage, move to another state, or change your marital status.

Who is eligible to open an HSA? – You must meet several IRS eligibility requirements in order to establish and contribute to an HSA. It is your responsibility to determine if you are eligible:

  • You must be enrolled in an HSA-eligible health plan on the first day of the month. For example, if your coverage is effective on May 15, you are not eligible to contribute to or take a distribution from your HSA until June 1.
  • You cannot be covered by any other health plan that is not an HSA-eligible health plan.
  • You cannot currently be enrolled in Medicare.
  • You cannot be claimed as a dependent on another person’s tax return.

If you open an HSA and do not meet the above criteria, your contributions, any investment earnings, and distributions may be subject to income taxes, penalties, and/or excise taxes. Additionally, in order to open and contribute to an HSA, you must have a valid U.S. address.

How does a person know if an HSA is right for them? – While many may benefit from an HSA, your personal situation will determine if an HSA-eligible health plan and HSA are the right approach to meet your health care needs. As you explore your options, consider your anticipated health care expenses, your current financial situation, and how much control you want over your medical spending. Keep in mind that HSAs come with the additional responsibility to track, manage, and monitor your health care and related expenses. The record-keeping of your HSA is up to you, and it’s important to hold on to all receipts, records, or other documentation as proof that the expenses you pay from your HSA are for qualified medical expenses.

What type of expenses does an HSA cover? – Distributions from an HSA used to pay for qualified medical expenses for you, your spouse, and dependents are tax free provided they meet the IRS definition of a qualified medical expense. The good news is that a lot of expenses qualify for payment or reimbursement, such as:

  • Health plan deductibles and coinsurance
  • Most medical care and services
  • Dental and vision care
  • Prescription drugs and insulin
  • Long-Term Care Insurance premiums

Note that these expenses must not already be covered by insurance and that health insurance premiums generally do not qualify. For more information about HSAs and qualified medical expenses, refer to IRS Publications 969 and 502 at or consult a tax professional.

Should an HSA be used to pay current qualified medical expenses or be saved for the future? – An HSA is your personal account and only you can choose how to use it. You can use the funds in your account as you incur qualified medical expenses, or leave your contributions in your HSA and pay for current medical expenses out of pocket.

Why would you want to do this? The combination of HSA tax advantages and the variety of investment options available through many HSAs provide an opportunity for potential growth. Consider this hypothetical example:

If you contributed $3,000 annually to an HSA and earned a 7% return over a 20-year period, you could potentially grow your balance to $127,291— that’s $60,000 from your own contributions plus $67,291 in earnings that you can use to pay for qualified medical expenses, free from federal taxes.