How To Open a Health Savings Account (HSA)

A health savings account (HSA) is a valuable tool for covering your health care expenses. It can also help you reduce your tax bill. Picking the right account is essential for reaching your goals, so how do you know which provider is best?

Where To Open an HSA

You can open an HSA at almost any bank or credit union. Some insurance providers also offer HSAs. If you're happy with the financial institution you bank with and convenience is number one on your priority list, you can add an HSA to your existing relationship. Some companies have begun to offer HSAs designed to offer consumers a way to maximize their health care savings with low, transparent fees and easy online management.

What To Consider When Opening an HSA

Beyond deciding where to open your HSA, there are other important factors to consider before you open an account:

Your Intentions

First, think about how you plan to use the account. Will you spend the funds every year, or do you plan to let the money accumulate over the long term? If you spend it as it comes in, the interest rate paid on your savings might not be a big deal. But if this account will supplement your retirement savings, long-term returns are more important.

Adding Money

Will you make contributions, will your employer do it, or will both of you add to the account? It needs to be easy to make those contributions—preferably electronic—so that the money gets into the account and you can take advantage of the tax benefits.

Fees

Most tax-preferred accounts charge fees, but fees vary and are sometimes waived with larger account balances. Occasionally, you'll find a small credit union that offers fee-free HSAs. Find out how much it costs to maintain the account, and evaluate how those costs might affect your return.

A bank that pays 1% more isn't worth looking at if the fees more than erode that extra 1%. Again, consider how you'll use the account and look at the fees for spending the funds (if you never plan to spend the money, it doesn't matter what they charge per withdrawal).

Spending Your Money

If you plan to use money from your account regularly, how easy will that be? Do you get a debit card to access funds, or is the process more cumbersome? Debit cards help you keep an electronic record of where your money goes (although you should always save receipts) and they make quick trips to the pharmacy easier.

How To Open an HSA Account

Opening an HSA is similar to opening any other bank account. You'll need to provide information about yourself, including a form of government-issued ID.

Who Qualifies To Open an HSA?

You must meet the following criteria to be eligible to open an HSA.

• Your health insurance is classified as a high-deductible health plan (HDHP)
• You aren't covered by Medicare
• You have no other health coverage with a few exceptions, which include workers' compensation and long-term care
• You can't be claimed as a dependent on someone else's tax return

An HDHP has a higher annual deductible than what typical health insurance plans require, and there's a maximum limit on the out-of-pocket expenses you'll pay. HDHPs may offer preventative care benefits with no or a low deductible.

Health Savings Accounts vs. Flexible Spending Accounts

HSA contributions are only available when you're covered by an eligible high-deductible health plan (HDHP). Unlike flexible spending accounts (FSAs or cafeteria plans), you can leave money in your HSA beyond the end of the year and save it for when you need it—it's not "use it or lose it."

What's more, the account is your account and is not tied to your employer. Don't feel like you need to spend down funds before you leave your job.

To get the best tax treatment, the funds must go toward qualified medical expenses, but there are other ways to use the money with less favorable treatment.

Here are some of the main differences between HSAs and FSAs.

Frequently Asked Questions (FAQs)