What Is a Health Savings Account and Do the Drawbacks Outweigh the Tax Advantages?

Health Savings Accounts work with high-deductible plans and offer tax benefits but carry risks

A Health Savings Account (HSA) lets you save pre-tax dollars to pay qualified medical expenses, deductibles, copayments, coinsurance and more—lowering your taxable income. HSAs offer federal tax deductions, tax-free growth and tax-free withdrawals for eligible expenses. However, they require high-deductible health plans and strict recordkeeping, so they’re not the right choice for everyone.

What is an HSA?

An HSA is a tax-advantaged account paired with a qualifying high-deductible health plan (HDHP). Funds pay medical costs that insurance doesn’t cover, from prescription drugs to dental work and vision care.

Eligibility requirements

To open an HSA, you must be enrolled in an HDHP that meets IRS criteria. For 2025, an HDHP must have a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage, and maximum out-of-pocket limits of $8,050 (self-only) or $16,100 (family). Check your plan documents or ask your insurer if your policy is HSA-eligible.

How HSAs work

You choose annual contributions, up to $3,850 for self-only or $7,750 for family coverage in 2025. Contributions via payroll deduction are pre-tax; direct contributions are tax-deductible. HSAs issue debit cards or checks to pay qualified expenses. Unused funds roll over indefinitely, and accounts remain yours even if you change jobs or retire.

Advantages

• Triple tax benefit: tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified expenses
• Rollover of unused balances year to year
• Portability, account stays with you regardless of employment
• Wide range of eligible expenses: medical, dental, vision, prescriptions
• Anyone can contribute up to limits, employer, family or individuals

Drawbacks

• Must have a high-deductible plan, increasing out-of-pocket exposure
• Funds used for non-qualified expenses incur taxes plus a 20% penalty if under age 65
• Strict recordkeeping required, retain receipts and documentation for IRS
• Some HSAs charge maintenance or transaction fees
• Reluctance to use funds may delay necessary care

Recordkeeping and documentation

Keep receipts, account statements and any prescriptions or Letters of Medical Necessity. For non-prescription items like over-the-counter medications, a doctor’s prescription is required. Failure to substantiate expenses can trigger taxes and penalties on withdrawals.

North Carolina resources

• Internal Revenue Service: official HSA rules and contribution limits at irs.gov
• NC Department of Revenue: state tax treatment of HSA contributions and withdrawals at ncdor.gov
• NC Department of Insurance: file complaints or ask about HDHP eligibility and consumer protections at ncdoi.gov
• Local HSA custodians and banks: compare fee schedules and investment options

Consider your healthcare needs, plan details and ability to manage high deductibles and recordkeeping before opening an HSA. The tax benefits are significant, but the account works best if you can contribute regularly and keep accurate documentation.