A Health Savings Account (HSA) is a tax-advantaged bank account used specifically for health-related expenses. Basically, it’s a way to reserve funds for a time when you might have high medical costs and want to avoid paying taxes on earnings and interest on those funds.
This account is set up separately from your other finances and allows you to set aside funds with the intention of using them for medical expenses incurred after the initiation of your HSA. Funds in this account roll over year-to-year if you don’t use them, and can be invested in the meantime to build more savings.
It is important to remember that these accounts can only be used for "qualified medical expenses". This includes things like doctor visits, prescription drugs, medical supplies or other expenses you incur to pursue a treatment plan recommended by your doctor.A list of examples of what qualifies can be found here. If you use your HSA funds for non-qualified expenses (think non-medical), you will generally pay income tax on the amount used, plus hit with an additional penalty tax for making a non-qualified withdrawal.
Requirements to be enrolled in an HSA: For 2020, you must be enrolled in a plan with an individual deductible of more than $1,400 and an individual out-of-pocket maximum of less than $6,900. We call this a “High Deductible Health Plan”, or HDHP. For family plans, your deductible must be more than $2,800 and an out-of-pocket maximum of less than $13,800.
Here's a chart and direct information from the IRS: Health Savings Accounts and Other Tax-Favored Health Plans
Setting up an HSA
To set up an HSA, you can either wait for your insurance company to offer you the opportunity to enroll or you can contact your current bank or another bank to set up an HSA through them. Different HSAs offer unique features. For example, some have better investment options, others have no monthly maintenance fee. Be sure to request a full list of fees and features from any entity offering you an HSA.