How does an HSA work?
November 26, 2017 12:55 PM   Subscribe

More specifically, where do you set one up if you are an independent freelancer? Pros and cons for different places. Also, I understand that some health insurance plans aren't compatible with HSA's. I'm not sure what this means exactly. I've had an FSA before but need to understand how an HSA works. I am in Missouri.
posted by rglass to Work & Money (5 answers total) 4 users marked this as a favorite
A health savings account is a tax-advantaged account to be used for the purposes of paying health care expenses. It is only available in conjunction with a high-deductible health plan (HDHP). Note that HDHPs are defined by the federal government based on their deductible amounts. The idea is that the HSA helps bridge the gap for health care expenses until your actual health insurance kicks in. If you don't have a HDHP, you can't have a HSA.

It differs from a FSA in that you don't lose the balance at the end of the year and can earn interest.

Here's the official definition from

Here's a nice description of HSAs and how they work from Nerd Wallet. NerdWallet actually has a number of possibly helpful articles in their Insurance section.

As for where to set one up, if you have a HDHP, your insurer will either offer this as part of their services or have a preferred bank they work with to do this. You can set a HSA up at a bank of your choosing, however. Vanguard and Bank of America both offer them.
posted by jeoc at 2:38 PM on November 26, 2017 [1 favorite]

I am self-employed and the year I had a HDHP I got an HSA. What that means is I went to my bank and said "I have a high-deductible health plan and I'd like to have a health savings account" they said okay and then there was a ton of paperwork I had to fill out and then I had a special bank account at my same old bank.

Certain plans will work with HSAs and I'm not sure what your options are but in my state it was very clear from the health insurance options which ones did and did not work with HSAs. My bank was not knowledgeable enough to know how much money I could put in mine and I wound up overfunding it (i.e. putting more into it than I was legally allowed to) but I corrected it fairly soon afterwards and it was no issue.

I had to keep track of what I spent the money on, theoretically, because if I was audited I'd have to explain it, but otherwise no one pays attention to what you spend the money on (i.e. there is no level of bureaucracy checking your expenditures). There is basically a list of things you can and can't use HSA money for. For me, I basically spent it on prescriptions and co-pays. It didn't wind up really solving a problem for me (both the HDHP, I had a lot of expenses that year) and the HSA so I spent it down in the one year and then closed it out. I had to fill out some form about it come tax time.
posted by jessamyn at 2:42 PM on November 26, 2017

jessamyn - a follow up question. as a person who is self-employed, how would i get the money that comes in for my business into the hsa account? all monies go straight into my business account normally. or does it go in and then go out and then it gets subtracted when it's tax time?
posted by rglass at 4:07 PM on November 26, 2017

You just put it there however you move money between accounts. You need to let the IRS (I think) know how much you put in it, but you can literally cut yourself a check or whatever you do to pay yourself. For me it was a secondary account to my main account so I just transferred it in. Just check and see what the maximum is that you can put into it. I was actually sort of shocked at how half-assed the whole thing was. The main thing is to make sure you keep good records for tax time.
posted by jessamyn at 5:24 PM on November 26, 2017

One cool trick with HSAs is that they can be used as a tax shelter and emergency savings account, at the same time.

Let's say you put money in an HSA in 2017, and have $1,000 worth of qualified medical expenses. If you have the money outside the HSA to pay that $1,000, then do that. Leave the full balance in the HSA. BUT -- keep the receipts for the medical expenses. Then, if you need $1,000 in 2019, you can withdraw that money from the HSA. The thing is, you don't need to spend the HSA money in 2017 just because that's when the expense happens. You can even wait until you retire and pull out ALL the money for the qualified medical expenses -- tax free. You just need to have receipts showing that you could have justified using the HSA to pay for the expenses at the time they accrued.
posted by Capri at 12:51 PM on November 28, 2017

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