Health Savings Accounts: What You Don’t Know Could Hurt You(r) Savings

Early in my tenure at the Employee Benefit Research Institute, I was standing in line at a store when I heard the woman ahead of me patiently explaining to her colleague how health savings accounts work.  “You can keep the money in there as long as you want,” she assured the other woman. “It’s not like FSAs where you have to spend the money every year.” While it was encouraging to hear people getting the message out on HSAs, at the same time, it underscored just how profoundly misunderstood these types of accounts are. In this American Savings Education Council blog, Chief Content Officer at the American Retirement Association Nevin Adams sets the record straight on how HSAs work.


Health savings accounts, or HSAs, have been around since the mid-1990s — but they’re still a new benefit for many workers, though they are rapidly growing in importance as a health care option. 

A recent report by the Employee Benefit Research Institute cites estimates that nearly half of small employers offer an HSA-eligible health plan, alongside two-thirds of medium-sized employers and nearly 8 in 10 large employers.  In fact, it’s been estimated that there are currently 28 million HSAs in existence, with some $66 billion set aside in those accounts.

That said, there is a lot of confusion about these accounts, how those savings can be used, and how they can — and should — factor into your savings plans.  Here are five things you may not know that can help you make better usage of this savings option:

You Can Withdraw Funds From Your HSA at Any Time

You can withdraw funds from an HSA at any time — and for any reason — but unless they are used to pay for qualified medical expenses, you’ll have to pay taxes on the money you withdraw (and, if you are under age 65, also pay a 20 percent penalty).

But You Don’t Have to Spend It “Now”

A recent industry survey found that just 30 percent of respondents with an HSA say they view their account primarily as a tool to save for future health care expenses. By contrast, half say they use their account primarily to pay for current-year health expenses and 20 percent say they use it both to save and to spend.  An HSA provides flexibility: Even if you change jobs or leave the work force, you keep the account — and the savings.

You Won’t Lose It if You Don’t Use It

There is no “use-it-or-lose-it” rule associated with an HSA, as any money left in the account at the end of the year automatically rolls over and is available in the future. That’s important to remember since HSAs are often confused with flexible spending accounts, or FSAs, which DO have a “use-it-or-lose-it” provision. 

HSA Savings Can Be Invested

HSAs can be invested in the same investment options that have been approved for individual retirement accounts (IRAs) — i.e., bank accounts, certificates of deposit (CDs), money market funds, stocks, bonds, and mutual funds. Many HSA banks/custodians, however, require that an HSA has at least a minimum balance in order to invest HSA funds in options beyond cash or cash equivalents.

HSAs Can Be “Better” Than a 401(k)

Contributions to an HSA are pretax — just like your 401(k).  And any earnings in your HSA also build up tax free — just like your 401(k).  It’s “better” than a 401(k) because as long as you spend the savings on qualified medical expenses, you won’t have to pay taxes on that distribution.  Because of that “triple tax advantage,” it can be better than a 401(k) for things like saving for health care expenses in retirement.

However, the limits on how much you can save in an HSA are lower than for a 401(k) — and the company match may be higher in your 401(k) as well.  So, the smart thing to do is to consider both — and consider how to get the best advantage from the combination, if both are available.  

You can find more information at https://www.irs.gov/publications/p969.

— Nevin E. Adams, JD