when you pay qualified medical expenses equal to a plan s deductible amount additional qualified expenses are divided between you and the plan 
for example the insurer may cover a percentage of the qualified expenses per the contract usually 80 to 90 while you may pay the remaining 10 to 20 or a specified co pay so if you had an annual deductible of 1 600 in 2023 and a medical claim of 3 500 pays the first 1 600 to cover the annual deductible you would pay 10 to 20 of the remaining 1 900 and the insurance company would cover the rest once the annual deductible is met in a given plan year the plan typically covers any additional medical expenses except for any uncovered costs under the contract such as co pays the insured can withdraw money accumulated in an hsa to cover these out of pocket expenses 9health savings accounts should not be confused with health spending accounts which employers use in canada to provide health and dental benefits for their canadian employees 10advantages and disadvantages of an hsahsas have advantages and drawbacks the effect of these accounts depends on your personal and financial situations contribution tax advantagesdistribution tax advantagesinvestment optionsdeductible requirementsrequires extra cashfiling requirementscontribution tax advantages employer and individual contributions by payroll deduction to an hsa are excluded from the employee s taxable income an individual s direct contributions to an hsa are 100 tax deductible from the employee s income earnings in the account are also tax free however excess contributions to an hsa incur a 6 tax and are not tax deductible 11distribution tax advantages distributions from an hsa are tax free provided that the funds are used for qualified medical expenses as outlined by the irs distributions used for medical expenses covered under the hdhp plan are included in determining if the hdhp s deductible has been met 12investment options you can also use the money in your hsa to invest in stocks and other securities potentially allowing for higher returns over time 13deductible requirements the most obvious key drawback is that you need to be a good candidate for an hdhp in addition you must have a high deductible plan lower insurance premiums or be affluent enough to afford the high deductibles and benefit from the tax advantages requires extra cash individuals who fund their own hsas whether through payroll deductions or directly should be financially capable of setting aside an amount that would cover a substantial portion of their hdhps deductibles individuals without enough spare cash to set aside in an hsa may find the high deductible amount burdensome filing requirements hsas also come with filing requirements regarding contributions specific rules on withdrawals distribution reporting and a record keeping burden that may be difficult to maintain 14withdrawals permitted under an hsaamounts withdrawn from an hsa aren t taxed as long as they are used to pay for services that the irs treats as qualified medical expenses the plan s manager will issue an irs form 1099 sa for distributions from the hsa here are some basics you need to know if distributions are made from an hsa to pay for anything other than a qualified medical expense that amount is subject to both income tax and an additional 20 tax penalty however once an individual turns 65 the 20 tax penalty is eliminated and only income tax would apply for non qualified withdrawals 18hsa contribution rulescontributions made to an hsa do not have to be used or withdrawn during the tax year instead they are vested and any unused contributions can be rolled over to the following year also an hsa is portable meaning that if employees change jobs they can still keep their hsas 1an hsa plan can also be transferred to a surviving spouse tax free upon the account holder s death 19