Health Savings Accounts (HSAs) are increasingly popular, but almost 90% of employees don’t fully understand what they are or how they work. Those with high deductible health plans (HDHPs) are missing out on big savings.

Understanding your insurance benefits can be a challenge. Once you’ve navigated the hazardous waters of open enrollment, you may still face the decision of whether an HSA is right for you. Chances are, it is.

A Triple Tax Bonanza

Insurance covers the big-ticket items. Need a knee replacement? Have a fender-bender? Your health insurance plan can offer you some peace of mind that these things won’t lead to financial ruin.

But all of us have small healthcare expenses–incidentals that you may not even think of as “healthcare” at first consideration. Maybe you need a walker or a cane after your knee replacement. Or maybe you need new eyeglasses to avoid future fender-benders. A Health Savings Account is perfect for these occasions, but it’s so much more than a tool for planning ahead.

HSAs are triple tax free. First, that means that you can specify a portion of your paycheck to go to your HSA before taxes. Depending on your tax bracket, that could effectively boost your contribution by anywhere from 10% to 37%. Second, your savings account can accrue interest (or, it can be invested) tax-free. Third, when you withdraw your HSA funds for a qualified medical expense, you won’t pay taxes on that withdrawal.

In short, if taxes give you a headache, you can make the government help pay for the aspirin.

Some employers even offer to contribute to an employee’s HSA: That’s more free money for you!

You Can’t Put a Price on Peace of Mind

HSAs aren’t just for contact lenses and chiropractors; they can help you manage your copays and deductibles, too. This is a big help for employees who worry about meeting a larger deductible with the HDHP. Many HSAs can be tied to a debit card you can use for doctor visits or trips to the emergency room: Just swipe and your balance is deducted from your account.

If you have a qualifying medical expense early in the year, before you’ve had time to build your balance, you can still use your HSA funds to reimburse yourself later.

If You Don’t Use It, You Don’t Lose It

Don’t confuse HSAs with FSAs (Flexible Spending Accounts). The programs share some similarities, but with an FSA, you have to use your contributions by the end of the year or you can lose out.

HSAs roll over, year after year. There are guidelines for how much you can contribute each year. For 2021, the maximum is $3,600 for single coverage and $7,200 for a family. If you’re 55 or older, you can add a $1,000 “catch-up” contribution each year.

There is no limit to how much money you can accrue in your HSA. That means less worry over an unexpected expense. You can also port your HSA to a new account when you have a new employer. If your new workplace doesn’t offer an HDHP, you won’t be able to contribute any more to your HSA, but the funds you have amassed will always be yours to spend on qualified medical expenses. You don’t have to leave your investment behind.

What about Non-Medical Emergencies?

If you’re pinching pennies, even the lure of massive tax savings might not persuade you to part with your money. After all, what if you have a personal, non-medical emergency and all your available cash is stashed away in your HSA?

Under IRS guidelines, you can still access your HSA funds. You’ll lose the tax exemption on that withdrawal and, if you’re under 65, you’ll have to pay a 20% penalty. That’s a steep enough drawback to discourage casual dips into your HSA, but just having the option available might help some decide that there’s not much of a downside in funding a Health Savings Account.

What’s the Catch?

One HSA requirement to keep in mind is that you can only use the funds for qualified medical expenses (that’s the easy part). When it’s time to file your taxes, you’ll need to prove that you used the funds for qualified medical expenses. (After all, the IRS wasn’t going to let you avoid all its headaches.) Also, depending on your plan, there might be some limits on where you can invest your HSA funds. If you had hoped to play the market with that money, you might be disappointed with your investment options.

If you use a debit card with your account, you’ll be ahead of the paper-trail game. Or, you can rely on Nayya to keep track of your HSA balances, expenses, and reimbursement, all from your personalized dashboard. Nayya can show you which expenses are allowable under IRS rules and make sure you make the most of your HSA.