What a medical savings account is and who can open one

A medical savings account is a tax-advantaged account that lets you set aside money specifically for healthcare costs. The money you put in is not taxed, and when you withdraw it to pay for medical expenses, those withdrawals are also tax-free. This means you keep more of your money instead of paying taxes on it.

There are three main types of medical savings accounts, and which one you can open depends on your health insurance situation. The most common is a Health Savings Account (HSA), which requires you to have a high-deductible health plan. A Flexible Spending Account (FSA) is offered through your employer and does not require a specific type of insurance. A Dependent Care FSA covers childcare and adult dependent care costs, not medical expenses. Each has different rules about who can open one and how much you can contribute each year.

Key Takeaways

  • Health Savings Accounts require you to be enrolled in a high-deductible health plan, but you control the account and can keep unused money year to year.
  • Flexible Spending Accounts are offered through your employer and use a "use it or lose it" rule, meaning unspent money does not roll over to the next year.
  • You open an HSA through a bank or financial institution, while an FSA is set up through your employer's benefits office.
  • The amount you can contribute changes each year and depends on your age and which type of account you open.

Opening a Health Savings Account (HSA)

To open an HSA, you must first be enrolled in a high-deductible health plan through your employer, the individual market, or Medicare. Your health insurance company or employer will tell you whether your plan qualifies. Once you confirm your plan is may be able to access, you can open an HSA at a bank, credit union, or online financial institution. Many banks offer HSAs alongside their regular savings accounts, and some specialize in them.

The process is straightforward: contact the financial institution, provide your name, Social Security number, and proof of your high-deductible health plan enrollment. You will need to show documentation from your insurance company stating your plan type and deductible amount. Some banks let you start the process online and upload documents electronically. Others require you to visit in person or mail documents. Once approved, you can begin making contributions when ready.

You can contribute money to your HSA on your own schedule throughout the year, or you can arrange for automatic monthly transfers from your checking account. If your employer offers an HSA, they may contribute money on your behalf, and you can contribute additional money yourself up to the annual limit. The annual contribution limit changes each year — check with your bank or the IRS website for the current year's amount.

Opening a Flexible Spending Account (FSA) through your employer

An FSA is set up through your employer's benefits office, not through a bank. You can only open one during your company's open enrollment period, which usually happens once a year in the fall. If you are a new employee, you typically have 30 to 60 days from your hire date to enroll. If you experience a may have access to life event — such as marriage, divorce, birth of a child, or loss of health insurance — you may be able to open an FSA outside of open enrollment.

To open an FSA, contact your employer's human resources or benefits department and ask for the enrollment forms. You will choose how much money to contribute from your paycheck each month. Your employer deducts this amount before taxes are calculated, which reduces your taxable income. The money goes into an account that you can use to pay for medical expenses throughout the year.

One important difference between an FSA and an HSA is the "use it or lose it" rule. Any money you do not spend by the end of the year is forfeited — you cannot roll it over to the next year. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, and some allow you to carry over up to $610 (this amount changes yearly). Ask your benefits office what your employer's specific rules are before you decide how much to contribute.

What documents you will need

For an HSA, you will need proof that you are enrolled in a high-deductible health plan. This is usually a document from your insurance company called a Summary of Benefits and Coverage, a plan document, or an enrollment confirmation. Your insurance company can email or mail this to you, or you can read it from your insurance company's website. You will also need a government-issued ID and your Social Security number.

For an FSA, you typically do not need to provide proof of insurance. Your employer already has your employment information on file. You will need to complete the enrollment form provided by your benefits office, which asks for basic information like your name, address, and how much you want to contribute each month.

How much you can contribute each year

The amount you can put into a medical savings account is set by federal law and changes each year. For an HSA, the limit depends on whether you have individual coverage or family coverage, and it also increases if you are 55 or older. For an FSA, the limit is the same for everyone, regardless of age or coverage type, but it is typically lower than an HSA limit.

You can find the current year's contribution limits on the IRS website or by asking your bank or employer. If you contribute more than the legal limit, you will owe taxes and penalties on the excess amount. It is important to know your limit before you set up automatic contributions.

Using your account once it is open

Once your account is open, you can use the money to pay for may have access to medical expenses. These include doctor visits, prescription medications, dental work, vision care, and medical equipment like hearing aids or crutches. They do not include cosmetic procedures, gym memberships, or over-the-counter medications (with some exceptions for certain over-the-counter items).

Most medical savings accounts come with a debit card that you can use at pharmacies and medical offices. You can also pay out of pocket and then withdraw money from your account to reimburse yourself. Keep receipts and documentation of your medical expenses in case you are asked to prove that your withdrawals were for may have access to expenses. The IRS can audit medical savings accounts, so accurate record-keeping protects you.

What happens if you change jobs or insurance

If you have an HSA and you change jobs, the account stays yours — it does not belong to your employer. You can keep contributing to it as long as you remain enrolled in a high-deductible health plan, even if it is through a different employer or the individual market. You can also keep the account open after you retire, as long as you are still covered by a high-deductible plan.

If you have an FSA and you change jobs, the account closes. You forfeit any money remaining in it, unless your employer offers a grace period. This is one reason to be conservative about how much you contribute to an FSA — contribute only what you are confident you will spend. If you change jobs and your new employer offers an FSA, you can enroll in their plan during your new-hire enrollment period.

Frequently Asked Questions

Can I have both an HSA and an FSA at the same time?

You can have both, but there are strict rules. If you have an FSA, you can only have a limited-purpose FSA that covers dental and vision expenses, not general medical costs. This is because the IRS does not allow you to have two accounts that cover the same medical expenses. Ask your employer whether they offer a limited-purpose FSA if you want to keep both accounts.

What if I do not spend all the money in my HSA by the end of the year?

Unlike an FSA, unused money in an HSA rolls over to the next year. You can keep accumulating money in your HSA indefinitely, and you can use it for medical expenses whenever you need it. Some people use their HSA as a long-term savings account for healthcare costs in retirement.

Can I withdraw money from my medical savings account for non-medical expenses?

You can withdraw money, but if it is not for a may have access to medical expense, you will owe income tax on the withdrawal plus a 20 percent penalty. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals. It is best to treat your medical savings account as money set aside specifically for healthcare.

Do I need to report my medical savings account to the IRS?

Yes. When you open an HSA, your bank reports it to the IRS using your Social Security number. You will receive a Form 1099-SA each year showing how much you withdrew. You report this on your tax return. For an FSA, your employer handles the tax reporting through your W-2 form.

What if my employer does not offer an HSA or FSA?

If your employer does not offer an FSA, you cannot open one on your own — it must be through an employer. However, you can still open an HSA on your own if you are enrolled in a high-deductible health plan, whether through your employer or purchased individually. Contact a bank or credit union to start the process.