As Tax Day approaches, an underused part of many health care plans could offer a chance to significantly reduce your tax bill.

A health savings account, or HSA, can help pay for some medical expenses, if you qualify to have one. And they offer three valuable tax breaks: Money is deposited pretax, can grow tax-free and is not taxed when you spend it, as long as the expenses are eligible.

It is rare for so many tax advantages to be wrapped into one benefit, financial advisers say.

“It’s a great deal,” said Neal Van Zutphen, a certified financial planner in Tempe, Arizona, “even if you don’t invest the money.”

There’s a catch, though: The accounts are available only to people with health insurance plans that meet specific criteria, such as a high deductible, which is the amount a person pays for nonpreventive medical care before insurance. For 2020 and 2021, the amount is at least $1,400 for an individual or $2,800 for family coverage.

The high deductibles could make HSA-eligible plans (which are usually labeled as such) unattractive for those with chronic conditions or costly health needs, even if monthly premiums are lower.

But the accounts could also significantly reduce your tax bill.

Tax Day is the deadline for making deductible contributions for 2020 to health savings accounts. This year, the date was pushed back to May 17 because of the pandemic. But the IRS has not confirmed that the contribution deadline also will be delayed, although last year it was.

A person does not have to itemize personal deductions on a tax return to claim the HSA benefit. It is reported with “adjustments” that reduce taxable income. (Two states — California and New Jersey — do tax HSA contributions as capital gains.)

Even though the number of HSAs has been growing, experts say that they are underused, and that more could be done to encourage their use. There were 30 million HSAs holding about $82 billion at the end of 2020, according to Devenir, an HSA services firm.

The accounts can pay for a variety of medical and health expenses, including doctor visits, hospital stays, surgery, and vision or dental care. The money can also go toward long-term-care insurance premiums and services.

The federal government’s pandemic relief program expanded what HSAs can pay for, including nonprescription medicine like pain relief and allergy pills, and menstrual products like tampons and pads. (The IRS has a full list of eligible items.)

Some employers match contributions to HSAs as they do retirement savings. But self-employed people and contractors can open them, too.

People often confuse HSAs with other types of health accounts, such as flexible health spending accounts. But unlike FSAs, health savings accounts are portable: If you change jobs or leave the workforce, you keep the account. Contribution limits are higher for HSAs, and there is no deadline to spend the cash. Unspent money can be invested for health needs in retirement.

Here are some questions and answers about health savings accounts:

How much can I contribute to an HSA?

For 2020, people with individual health coverage were able to contribute up to $3,550, including employer contributions.

Those with family coverage could have contributed as much as $7,100. (People older than 55 can contribute an extra $1,000.) For 2021, the limits are $3,600 for individuals and $7,200 for family coverage.

Can I have more than one HSA?

Yes. If you do not like the investment options offered by your employer’s HSA, for example, you can open an HSA with a different provider and transfer funds into it (while keeping the old one open to receive any employer matches). But the total contributions — including any from your employer — cannot exceed the annual limit set by the IRS, said Roy Ramthun, president and founder of HSA Consulting Services.

What if I spend my HSA money on ineligible items?

Spending on unqualified care or products is subject to regular income tax, plus a penalty of 20% of the amount withdrawn, according to Fidelity. For anyone 65 or older, the penalty goes away, though the money is still subject to regular income tax. Spending on eligible items remains tax-free.


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