What Is a Health Savings Account?

A Health Savings Account (HSA) is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual's employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs.

How an HSA Works

A Health Savings Account is one of the ways an individual can cut costs if they are faced with high deductibles. A deductible is the portion of an insurance claim that the insured pays out-of-pocket. A high-deductible health insurance plan (HDHP) is an insurance plan that has a higher annual deductible than typical health plans, with a minimum and maximum deductible of $1,350 and $6,750 (as of 2019), respectively, for individuals. For families, the minimum is $2,700, and the maximum is $13,500.

When an individual has paid the portion of a claim they are responsible for, the insurance company will cover the remaining portion, as specified in the contract. For example, under the HDHP, an individual with a deductible of $1,500 who makes a medical claim for $3,500 will have to pay $1,500 since the insurer is only responsible for the excess, which is $2,000. To supplement the funds that an insured has to pay out-of-pocket, a Health Savings Account (HSA) can be used.

What Is a Health Reimbursement Arrangement (HRA)?

A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers are allowed to claim a tax deduction for the reimbursements they make through these plans, and reimbursement dollars received by employees are generally tax free.

What Is An FSA?

A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs.

You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside.