Health Savings Accounts (HSAs) are tax-advantaged savings accounts designed to help individuals and families with High-Deductible Health Plans (HDHPs) cover their medical expenses. These accounts offer a unique opportunity to save and pay for qualified healthcare costs, while also providing valuable tax benefits.
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The primary purpose of accepting HSA card payments is to allow individuals to set aside money on a pre-tax basis to pay for current and future medical expenses. In this blog, we will explain how HSA payments work. Let's dive right in!

How HSAs work
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To open and contribute to an HSA, you must be enrolled in an HDHP. The maximum out-of-pocket expenses (including deductibles and copayments) for an HDHP are $7,500 for self-only coverage and $15,000 for family coverage.
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Once you've enrolled in an HDHP, you can open an HSA with a bank, credit union, or other financial institution. The funds you contribute to your HSA are generally made on a pre-tax basis, meaning they are not subject to federal income tax, Social Security tax, or Medicare tax. Additionally, the money in your HSA can grow tax-deferred, and qualified withdrawals are also tax-free.
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For 2024, the annual contribution limits for HSAs are $4,150 for self-only coverage and $8,300 for family coverage. Individuals aged 55 and older can also make an additional "catch-up" contribution of $1,000 per year.
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Strategies for spending from your HSA
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When it comes to spending your HSA funds, there are two main approaches to consider:
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● 'Use-as-you-go' Method: The 'use-as-you-go' approach involves using your HSA funds to pay for qualified medical expenses as they arise. This can include costs such as deductibles, copayments, prescription drugs, and even certain over-the-counter medications. When accepting HSA card payments, using your HSA funds to cover these expenses, you can effectively reduce your out-of-pocket healthcare costs and enjoy the tax benefits of the account.
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● 'Let-it-grow' Approach: The 'let-it-grow' approach allows your HSA funds to accumulate and grow over time, potentially investing the money in mutual funds, stocks, or other investment vehicles. This strategy can be particularly beneficial if you have the financial means to pay for your current medical expenses out-of-pocket, as it allows your HSA to grow tax-deferred and potentially provide a larger pool of funds for future healthcare needs or retirement.
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Qualified vs. Non-Qualified medical expenses
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Qualified medical expenses are those that are eligible for tax-free withdrawal from your HSA. These include various healthcare-related costs, such as deductibles, copayments, prescription drugs, dental care, vision care, and even over-the-counter medications.
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Non-qualified medical expenses, on the other hand, are those that do not meet the criteria for tax-free withdrawal. Examples include cosmetic procedures, gym memberships, and certain insurance premiums. If you withdraw funds from your HSA for non-qualified expenses, you will be subject to regular income tax, as well as a 20% penalty if you are under the age of 65.
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Penalties for non-qualified withdrawals
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As mentioned, if you withdraw funds from your HSA for non-qualified expenses before the age of 65, you will be subject to a 20% penalty in addition to regular income tax. This penalty is designed to discourage the use of HSA funds for non-medical purposes and to ensure that the account is used for its intended purpose.
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However, once you reach the age of 65, you can withdraw funds from your HSA for any reason without the 20% penalty, though you will still have to pay regular income tax on the withdrawal.
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Special rules for withdrawals after turning 65 or becoming disabled
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There are a few exceptions to the withdrawal rules for HSAs. If you become disabled or reach the age of 65, you can withdraw funds from your HSA for any reason without the 20% penalty, though you will still have to pay regular income tax on the withdrawal.
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Additionally, if you withdraw funds from your HSA to pay for Medicare premiums, the withdrawal will be considered a qualified medical expense and will not be subject to the 20% penalty or regular income tax.
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Process of withdrawing funds for qualified medical expenses
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To withdraw funds from your HSA for qualified medical expenses, you typically have a few options:
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● Debit Card: Many HSA providers offer a debit card that you can use to pay for qualified expenses directly from your HSA.
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● Reimbursement: You can pay for qualified expenses out-of-pocket and then submit a reimbursement request to your HSA provider.
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● Online Bill Pay: Some HSA providers allow you to pay qualified medical bills directly from your HSA account using their online bill pay feature.
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Be sure to keep detailed records of all your qualified medical expenses, as you may need to provide documentation to your HSA provider or the IRS if audited.
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Conclusion
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Health Savings Accounts (HSAs) offer a unique and valuable opportunity to save and pay for qualified medical expenses while also providing significant tax benefits. At Binkey, we provide merchants and retailers the ability to accept HSA card payments from their customers for eligible health expenses.