What Is an HSA, and Why Should You Actually Care?

If you just started paying attention to your workplace benefits, you may have come across three letters you've never thought much about: HSA.

It stands for Health Savings Account.

And while the name makes it sound like another complicated piece of health insurance, an HSA is actually pretty simple: it's an account that lets eligible people set aside money for qualified healthcare expenses while getting some valuable tax advantages.

It's also your money.

That last part matters more than you might think.

First things first: An HSA isn't health insurance

Your health insurance and your HSA are two different things.

Your health insurance helps cover eligible medical costs according to your plan. Your HSA is an account containing money you can use to pay for qualified healthcare expenses.

To contribute to an HSA, you have to meet IRS eligibility requirements. These generally include having qualifying health coverage and not having certain other disqualifying coverage. 

If your benefits information says you're eligible for an HSA, don't skip past it just because you aren't sure how it works.

It can be a pretty powerful financial tool.

You can make saving basically automatic

Depending on your employer's benefits, you may be able to have HSA contributions taken directly from your paycheck.

Choose an amount, and instead of having to remember to move money into savings yourself, it can go into your HSA automatically.

You don't have to start with hundreds of dollars.

If you're paid every other week:

• $25 per paycheck = $650 over 26 paychecks
• $50 per paycheck = $1,300
• $100 per paycheck = $2,600

Little by little, you're building money specifically for healthcare expenses.

There can also be additional tax advantages when eligible HSA contributions are made through an employer's qualifying cafeteria plan. The IRS generally treats employer HSA contributions, including employee contributions through a cafeteria plan, as excluded from the employee's income. 

Here's where taxes come into the picture

HSAs have a combination of federal tax benefits that's pretty unusual.

Generally:

1. Contributions receive favorable tax treatment.

   Eligible contributions may be deductible or excluded from income, depending on how they're made.

2. Your money can grow tax-free.

   Earnings within the HSA generally aren't included in federal taxable income while they're in the account.

3. Qualified withdrawals can be tax-free.

   When you withdraw the money to pay or reimburse qualified medical expenses, those distributions can generally be received free of federal income tax. 

That's why you'll sometimes hear this referred to as the "triple tax advantage” of an HSA.

In other words, an HSA isn't just a place to stash money for your next doctor's appointment. The tax benefits are a major part of its value.

And no, you don't have to spend it by December 31

This is one of the biggest misunderstandings about HSAs.

Your unused HSA balance can accumulate from year to year. IRS guidance allows HSA funds to accumulate over the years rather than requiring you to spend the balance annually. 

So, if you contribute $1,000 and only use $300 for qualified healthcare expenses, you haven't lost the other $700.

It stays in your HSA.

That means someone who's relatively healthy today can still have a reason to save.

You're not only preparing for this year's expenses. You're building money that can be available for qualified healthcare expenses you may face in the future.

Change jobs? Your HSA goes with you.

This one is particularly important if you're early in your career.

Your HSA belongs to you, not your employer.

IRS guidance specifically describes HSAs as individually owned and portable. If you change employers or leave the workforce, your HSA stays with you. 

The money you've already saved is still yours.

And if you continue to meet the IRS eligibility requirements, you can continue making contributions.

That's very different from thinking of an HSA as simply another benefit attached to your current job.

So what can you actually spend HSA money on?

HSAs are designed for qualified medical expenses.

That can include many medical, dental and prescription expenses, subject to IRS rules. Pathways provides an HSA debit card that can be used for qualified medical expenses, giving members direct access to their HSA funds.

There are rules about what's considered a qualified medical expense, so this isn't just money you can withdraw for anything without potential tax consequences. Nonqualified distributions can be taxable and, in some circumstances, subject to an additional 20% tax. 

What if you're healthy and barely go to the doctor?

Honestly, that's one of the reasons an HSA may be worth understanding.

If you're eligible and don't need to spend everything you contribute today, the unused money can remain in your account for future qualified healthcare expenses.

And with a Pathways HSA, your balance can earn dividends. Pathways also offers eligible HSA holders access to a self-directed investment account through MyHSA and Devenir.

You don't have to turn your HSA into an investment account. And you don't have to max it out.

Starting small is still starting.

How much can you contribute?

For 2027, the IRS HSA contribution limits are:

$4,500 if you have self-only coverage
$9,000 if you have family coverage

Those are maximum annual contribution limits, not savings goals you're expected to hit.

Employer contributions also count toward the applicable annual contribution limit. 

So don't look at $4,500 and think, Well, that's not happening.

If $25 a paycheck makes sense for you, start there.

Why a Pathways HSA?

A Pathways HSA gives you a dedicated place to save for qualified healthcare expenses while taking advantage of the tax benefits available to eligible HSA holders.

Pathways HSAs offer:

• No monthly or annual fee when enrolled in eStatements
• A debit card for qualified medical expenses
• Competitive dividends on your balance
• The ability to keep your account if you change jobs
• Access to HSA investment options through MyHSA and Devenir

Most importantly, it's your account and your money.

The bottom line

You don't need to be a health insurance expert to start making sense of your benefits.

If you're eligible for an HSA, think of it as more than a way to pay a doctor's bill.

It's a way to automatically put money aside for healthcare, potentially reduce your federal tax burden, keep unused money for the future and take your account with you wherever your career goes.

Your future self may be pretty glad you started.