If you’ve ever enrolled in a high-deductible health plan, you’ve probably been asked if you wanted to sign up for a Health Savings Account (HSA). But what is an HSA, and what’s the difference between an HSA and health insurance? Dahna Sanders, Senior Workplace Banking Representative with First Merchants Bank, is here to help.

“Put simply, an HSA is a special savings account that allows you to put money aside specifically for medical expenses,” Dahna explained. “Typically, that money is deducted directly from your payroll, so all your HSA funds are pre-tax, and those funds roll over year after year.”

To open an HSA, you must be eligible for a high-deductible health plan – either through your employer or through the Affordable Care Act.

“An HSA goes along with those high-deductible plans,” Dahna said. “And it’s designed to help you budget for expenses that may not be completely covered by those plans – like office co-pays, prescriptions, and medical bills.”

“But,” you might say, “I can just save for those expenses with a regular savings account, right?” While that is true, the key difference between an HSA and a traditional savings plan is that an HSA is pre-tax.

“You’re actually saving money using an HSA,” Dahna explained. “If you used a traditional savings account, the amount would be taxed before being deposited into your account – that’s not happening with an HSA. So, it’s honestly cheaper for an individual to pay with an HSA than it would be if they paid out of pocket with a checking account.”

Another key difference is that your employer can also contribute to an HSA.

“Typically, if you have a high-deductible health plan that’s offered through an employer, the employer will also contribute a certain amount to an employee’s HSA – provided they meet a few requirements,” Dahna said.

Those requirements vary by employer but could include things such as getting an annual physical or completing routine, age-appropriate screenings.

However, HSAs do come with a few restrictions. Typically, the accounts include a contribution cap. For 2023, the max amount you can contribute to an individually held HSA is $3,850. If you have an HSA that covers expenses for other family members, the max contribution will be $7,750.

“It’s important to note that this includes employer contributions,” Dahna stated. “So, the max amount that can go into an account per annuum in 2023 will be $3,850. So you will need to find out how much your employer contributes, and then subtract that from $3,850 to determine how much you can contribute to your HSA in 2023.”

If you do happen to contribute more than the max, don’t worry, Dahna said. Most financial institutions will make it right – but it is important to take action.

“For example, I know at First Merchants we’ll alert the account holder and have them come in so we can give the overage back,” she shared. “If you over-contribute, we will send you an Excess Contribution Letter. If you receive one of these letters, I strongly encourage you to contact First Merchants Bank, as there could be tax consequences if the excess is not removed.”

But a max contribution limit isn’t the only restriction on an HSA account.

“An HSA is intended to only pay for medical bills,” Dahna said. “I often get asked, ‘If I have a hard time seeing, can I purchase an 80-inch screen TV to make my viewing easier?’ The short answer is, no, that likely would not qualify as a medical need. Now, if you were visually impaired and that was medically documented, and you could prove that an 80-inch screen TV was warranted – maybe. But that’s a decision that’s out of our hands as a financial institution.”

It's important, she added, for those who do have an HSA to be aware of which purchases are allowed, and which ones are not. Unwarranted purchases can result in an official Internal Revenue Service audit and may be subject to a 20 percent penalty fine. You can find a list of acceptable, and unacceptable, purchases, at www.irs.gov.

“To be safe, we really recommend you keep it to medical expenses – prescriptions, doctor’s visits, hospital bills, medical procedures, and the like,” Dahna cautioned.

So, want to find out if an HSA is right for you? Our HSA Calculator can help you get started.

Did you know First Merchants offers Health Savings Accounts? Check out our HSA offerings.

Please note that this information is not intended or provided to be used as a substitute for the advice of a tax professional. You are encouraged to consult with a licensed tax advisor regarding personal financial decisions.