We’d all love to have total, 100% insurance coverage for every one of our healthcare-related expenses. But we also know that’s simply not a realistic expectation. So what can we do to help bridge the gap between our coverage and our out-of-pocket costs?

One option is a Health Savings Account, or HSA. You may have heard about these from a physician, friend, insurance professional or accountant. An HSA offers a tax-advantaged way to save for medical expenses that are not covered by a high-deductible health plan (HDHP).

Let’s take a look at the definition of a Health Savings Account and whether one is right for you.

What Is a “High-Deductible” Plan?

Everyone looking at health insurance is faced with determining the appropriate balance between deductibles and premium levels. High-deductible plans with lower premiums can be a good option for many people, such as those who are young and healthy or those with the financial resources to handle the exposure to a higher deductible.

There are specific amounts that qualify as “high-deductible” in terms of out-of-pocket expenses that must be paid until insurance coverage begins. In 2019, those qualifying amounts range from $1,350 to $6,750 for individuals and from $2,700 to $13,500 for families.

What Is an HSA and How Does One Work?

An HSA allows you to set aside pre-tax income through contributions to the account. Those contributions can be made by the individual, an employer or others as long as the annual contribution limits are not exceeded.

That means the amount of those pre-tax contributions is not included in taxable income. Contributions made on an after-tax basis can also be deducted. In addition, any interest earned from the account is tax-free.

Be aware that there are caps to how much you can shelter in an HSA. Contribution limits in 2019 are $3,500 for individuals and $7,000 for families. However, people who reach 55 years of age during a tax year can kick in an additional $1,000. Contributions in excess of those amounts incur a 6% tax and are not tax-deductible.

It’s important to note that these contributions don’t have to be used up within the year they are made, but can be rolled over. In addition, an HSA can be transferred to a surviving spouse.

Are There Eligibility Requirements?

Yes. Requirements include having no other health coverage than the high-deductible plan, not being enrolled in Medicare and not a dependent on someone else’s tax return. Withdrawals must pay for qualified medical expenses or they will be subject to regular income tax plus a 20% penalty. After age 65, taxes will be incurred but the penalty will not.

Qualified expenses that may be covered include deductibles, co-pays and co-insurance, as well as services such as dental, vision, prescription drugs and psychiatric treatment. Insurance premiums are generally not eligible, with some specific exceptions.

In terms of aging out of this kind of program, people 65 and older cannot contribute to an HSA. But they can still use funds from in an existing HSA.

Are There Downsides to an HSA?

The first, of course, is the calculated gamble on a high deductible plan and whether the amount that can be accrued in an HSA (combined with savings from lower premiums) will handle your non-covered expenses in a situation that my require a costly medical treatment or procedure.

You’ll also need to be ready to maintain receipts to support withdrawals from the account. And some HSAs involve monthly or per-transaction fees.

Overall, an HSA is probably not a prudent option for people with existing or anticipated high medical expenses.

Is an HSA Right for Me?

HSAs may be associated with a specific high-deductible plan. Or they can be opened through a health insurance provider or financial institution.

Talk to coworkers, friends and relatives about experiences they may have with an HSA. Sit down with your insurance agent or financial advisor to review your needs, the details of health insurance plans available and whether this kind of program makes good financial sense.