A Health Savings Account Is Not Health Insurance — Here's What Each One Does

No, they are separate things that work together

A health savings account (HSA) is a savings tool. Health insurance is coverage that pays for medical care. You need both, and they serve different purposes.

An HSA lets you set aside pre-tax money to pay for medical expenses later. Health insurance is a contract with an insurer that covers part of your doctor visits, hospital stays, prescriptions, and other care. Without health insurance, you have no coverage if you get sick or injured. Without an HSA, you straightforward pay medical bills with after-tax dollars instead of before-tax ones.

The confusion happens because HSAs are only available to people who have a specific type of health insurance called a high-deductible health plan (HDHP). You cannot open an HSA unless you are enrolled in an HDHP. But the HSA itself does not pay your medical bills — your insurance does. The HSA just holds money you use to pay your share of those bills.

Key Takeaways

• Health insurance pays for your medical care; an HSA is a savings account that holds money to pay your portion of those bills.
• You can only open an HSA if you have a high-deductible health plan, but the HSA does not replace that insurance.
• An HSA covers medical, dental, and vision expenses, but only if you have already paid your deductible or are using the money for out-of-pocket costs your insurance does not cover.
• If you do not have health insurance, an HSA alone will not protect you from the cost of a serious illness or injury.

How health insurance and an HSA work together

When you go to the doctor, your health insurance is what pays the bill first. You pay a copay or coinsurance (your share), and the insurance pays the rest. An HSA is where you keep money to cover that copay or coinsurance.

Example: Your health insurance has a $3,000 deductible. You go to the emergency room and the bill is $5,000. Your insurance pays $2,000 (the amount over your deductible). You owe $3,000 (your deductible). You can use HSA money to pay that $3,000. Without the HSA, you would pay it from your regular bank account with after-tax dollars.

An HDHP has a lower monthly premium than other insurance plans, which is the trade-off: you pay less per month but more out of pocket when you need care. An HSA helps offset that higher out-of-pocket cost by letting you save money before taxes are taken out.

What an HSA covers that health insurance might not

An HSA can pay for medical, dental, and vision expenses — but only if those expenses are not covered by your health insurance, or if you are using HSA money to cover your deductible or copay.

Your health insurance may not cover dental cleanings, vision exams, or hearing aids. An HSA can pay for those things directly. You can also use HSA money for over-the-counter medications, medical equipment like crutches or blood pressure monitors, and some treatments your insurance does not cover.

The key difference: health insurance decides what medical care it will pay for. An HSA is just a bucket of money. If your insurance does not cover something, the HSA can pay for it — but the HSA does not make the decision about what counts as a medical expense. The IRS does. The IRS publishes a list of what qualifies as a medical expense for HSA purposes.

What happens if you have an HSA but no health insurance

You cannot open an HSA without health insurance. The law requires you to be enrolled in an HDHP to contribute to an HSA. If you drop your HDHP coverage, you can no longer add money to your HSA, though you can still spend what is already in it.

If you have an HSA but lose your health insurance, you still have the money in the account, but you no longer have coverage for medical care. A serious illness or injury could cost tens of thousands of dollars. Your HSA savings might cover some of it, but probably not all. This is why health insurance is the primary protection — the HSA is a supplement.

The tax advantage of an HSA versus paying out of pocket

The main reason to use an HSA is the tax savings. Money you put into an HSA is not taxed as income. If you earn $50,000 and contribute $4,000 to an HSA, you only pay income tax on $46,000.

If you paid that same $4,000 in medical bills with regular paychecks, you would pay income tax on the full $50,000, then use after-tax dollars to pay the medical bill. Depending on your tax bracket, an HSA can save you 20 to 40 percent on the money you spend on medical care.

This is why an HSA is valuable even though it is not insurance. It is a way to reduce the cost of medical expenses you are going to have anyway.

When you might choose an HDHP and HSA

An HDHP with an HSA makes sense if you are young and healthy and do not expect to use much medical care. You save money on monthly premiums, and you can build up HSA savings over time. If you do need care, your insurance covers it, and you have HSA money to pay your share.

An HDHP is usually not a good choice if you have a chronic condition that requires frequent doctor visits or expensive medications. Your out-of-pocket costs will be higher, and the monthly premium savings may not make up for it.

The decision is about your health and your budget. Health insurance is the protection. An HSA is the tool that makes an HDHP more affordable.

Frequently Asked Questions

Can I use my HSA to pay my health insurance premium?

You can use HSA money to pay for COBRA coverage (continuation coverage if you lose a job) or for health insurance while you are unemployed. You cannot use it to pay the monthly premium for a regular health plan. You can use it to pay copays, coinsurance, and deductibles under any health insurance plan.

What happens to my HSA money if I change jobs?

Your HSA stays with you. It is your account, not your employer's. You can take it to a new job, a new employer's HSA plan, or keep it with the same bank or provider. The money is yours to keep and use whenever you need it for medical expenses.

If I have an HSA, do I still need to pay for health insurance?

Yes. An HSA is not insurance. You need health insurance to protect yourself from the cost of serious illness or injury. An HSA is a savings account that helps you pay the costs your insurance does not cover. Without insurance, an HSA alone will not pay for a hospital stay or major surgery.

Can I use HSA money for anything other than medical expenses?

You can withdraw HSA money for any reason, but if you use it for non-medical expenses before age 65, you pay income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason and only pay income tax (no penalty), but non-medical withdrawals are taxed as regular income.