Financial Fundamentals Blog

How Does an HSA Work? The Pros and Cons of Health Savings Accounts

Woman speaking to a pharmacist about medication


One of the most common questions when considering health care benefit options during enrollment is, what is the best way to save on health care costs? Should you enroll in a plan with a lower deductible or a high-deductible plan? Should you opt for a health savings account (HSA)? Most importantly, what exactly is an HSA, and how does an HSA work?


Health care can be expensive, so you need to make sure you’re saving for health care expenses, even if you don’t have ongoing medical conditions. An HSA makes this easy. Let’s explore HSAs, how they work and their benefits so you can make the best decision for yourself and your family.


What is an HSA?

An HSA is a savings account that enables you to set aside money for health care expenses in a dedicated account, reducing your out-of-pocket costs and financial stress later. The money is taken directly from your paycheck before taxes are taken out, so you’re taxed on a lower income than you would be without the HSA, reducing your tax liability each year.


Your HSA funds aren’t taxed when you take them out if you use them for qualified, out-of-pocket medical expenses, such as prescriptions, psychological care and other medical care. 


You can contribute to an HSA as long as you’re enrolled in an HSA-eligible plan, which is often called a high-deductible health plan (HDHP). However, it’s important to note that with these types of plans, the monthly premium (the amount you pay for your insurance each month) is lower than other benefit options, but your deductible is higher and you have to pay more out-of-pocket costs yourself before your insurance company pays its portion.


How does an HSA work?

You can sign up for an HSA through your health insurance company or an institution such as 7 17 Credit Union. Your HSA contributions can be automatically deducted from your paychecks, making it an easy way to save for medical expenses. However, you are limited in how much you can contribute to an HSA each year. 


For 2023, you can contribute up to $3,850 a year for self-only coverage and $7,750 for family coverage. In 2024, these numbers increase to $4,150 for self-coverage and $8,300 for family coverage.


Once you’ve enrolled in your HSA, you’ll receive a card that looks like and works similar to a credit or debit card. You can use your HSA card to pay for copays or coinsurance at the physician’s office or even to pay medical bills. You can also use an HSA to pay for acupuncture, hearing aids, prescriptions, psychological or psychiatric care, long-term care services and more. However, if you use your HSA to pay for a noneligible expense, you’ll need to pay income tax on the amount you used, plus a 20% penalty if you’re under 65 years old.


What are the benefits of an HSA?

On top of being an easy way to save for medical expenses, HSAs have several benefits. The funds you put into your HSA carry over from year to year, enabling you to save for large expenses in the future while still being able to use the funds now if needed. An HSA enables you to have more control over your money because you can decide how and when to save or spend the funds in your HSA.


One of the top benefits of an HSA is that it’s yours forever, meaning that if you choose to leave your current job or switch to a different HDHP, your HSA and the funds in it are still yours — you don’t forfeit them. This is a large difference between HSAs and a similar savings account called a flexible savings account (FSA). If you leave your current job where you have an FSA, you forfeit the funds in it.


Explore your health savings account options.

You can’t predict the future, but you can prepare as much as possible for unexpected expenses, such as medical bills. Explore options to help you set aside funds to cover health care costs today with 7 17 Credit Union.