Open Enrollment 2021: Do You Need an HSA?

Whether you’ve gotten a new job or changed health insurance plans, it’s a good idea to wonder whether you need a health savings account (HSA). 

An HSA isn’t compatible with all health insurance plans. But if you’re on a high-deductible plan, you may be eligible to contribute. And you might enjoy a world of benefits.

What Is an HSA and How Is It Different From an FSA?

Do you need an HSA? To answer that question, it’s important to understand how these accounts work. HSAs allow you to contribute pre-tax dollars to pay for healthcare expenses. In that regard, they’re similar to FSAs (flexible spending accounts). But there’s one key difference.

FSAs are typically “use it or lose it” accounts. If you don’t spend your balance by the end of your plan year, you risk forfeiting leftover money. HSAs let you use your money whenever you want. There’s no deadline.

In fact, HSAs encourage you to save some of your money for later, because you can invest unused funds, and grow your balance that way. Investment gains in an HSA are tax-free, and so are withdrawals, as long as you use the money to pay for qualified medical expenses. 

Employers that offer healthcare plans with high deductibles typically offer HSAs. If yours doesn’t, you could open your own separate HSA. You could also do that if you buy your own high deductible plan on the marketplace. You decide how much to contribute each year, up to the maximum allowed by the IRS. If your HSA is through your workplace, a portion of your pay usually goes into your HSA off the bat so you don’t have to think about it.

You usually get a debit card that’s linked to your HSA. You can use it for qualified medical expenses your health insurance plan doesn’t cover. Qualifying medical expenses include, but aren't limited to:

• Deductibles

• Copays

• Dental expenses

• Eye exams and contact lenses

• Medical supplies

Here’s a comparison of HSAs and FSAs so you can better understand the differences.

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Do You Qualify for an HSA?

HSAs are available only to people enrolled in a high-deductible health insurance plan (HDHP), as defined by the IRS. HDHPs have a higher annual deductible than typical plans, and a limit on how much you may be required to pay for out-of-pocket expenses. 

To qualify for an HSA in 2025, your plan must have:

• A minimum annual deductible of $1,650 for individuals, or $3,300 for families

• An out-of-pocket maximum of $8,300 for individuals, or $16,600 for families

You typically can't have an HSA and an FSA at the same time. But you may be eligible for a limited-purpose FSA or a dependent care FSA along with your HSA. Limited-purpose FSAs cover out-of-pocket expenses such as dental and vision items, services, and procedures.

The nice thing about HSAs is that you can enroll at any time during the year as long as your health plan meets the right criteria. You can also change your contribution during the year. 

Advantages of HSAs

HSAs are primarily used for medical expenses not covered by your health insurance plan. You can also think of them as tools that could help you reach your long-term financial goals and limit or avoid medical debt. 

If you’re wondering if you need an HSA, consider these advantages:

• Tax benefits. Contributions, investment gains, and withdrawals are tax-free when used for qualifying healthcare expenses. 

• Flexibility. You can use your HSA at any point without worrying about losing year-end unused funds, the way you can with an FSA. Once you turn 65, there are no penalties for non-medical HSA withdrawals. However, you pay taxes on non-medical withdrawals, just as you would with a traditional IRA or 401(k) plan withdrawal.

• Investment potential. You can keep your HSA in a cash account, but you could also invest the money. That could help your balance grow substantially over time, especially if you carry it forward for many years before taking a withdrawal. 

• Future security. An HSA could be a great way to add financial security to your retirement years. Many seniors find themselves paying more for healthcare than they did when they were younger. Having a dedicated account to cover those costs could help you financially later in life, and make it possible to avoid medical debt.

Consider an HSA as Part of Your Overall Financial Plan

Do you need an HSA? It depends on your usual healthcare expenses. But there’s little reason not to contribute to an HSA, given the benefits. And you may find that having money in an HSA helps you better manage your medical expenses, avoid debt, and feel more financially secure overall.