What an HSA plan does

An HSA (Health Savings Account) is a bank account you own that holds money specifically for medical expenses. You put pre-tax dollars into it, the money grows tax-free, and you withdraw it tax-free when you pay for medical care. Unlike a flexible spending account (FSA), the money rolls over year to year — you do not lose what you do not spend.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) through your employer, the marketplace, or Medicare. The HDHP is the insurance itself; the HSA is the savings account that goes with it. You cannot have an HSA without an HDHP, and you cannot be covered by other health insurance at the same time (with narrow exceptions for accident, disability, or dental-only plans).

Key Takeaways

  • You contribute pre-tax money to an HSA only if you are enrolled in a high-deductible health plan, and you own the account permanently even if you change jobs or insurance.
  • Money in an HSA grows tax-free and can be withdrawn tax-free for may have access to medical expenses including deductibles, copays, prescriptions, dental work, and vision care.
  • Contribution limits for 2024 are $4,150 for individual coverage and $8,300 for family coverage, set by the IRS and adjusted yearly.
  • If you withdraw HSA money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty; after 65, you pay only income tax.
  • An HSA is portable — it stays with you if you leave your job, change insurance, or retire, and you can invest the balance in stocks or bonds.

How contributions work and who can contribute

You, your employer, or both can put money into your HSA. Contributions come out before income tax is calculated, which means you save on federal, state, and payroll taxes. If your employer contributes, that money does not count toward your taxable income.

The IRS sets annual contribution limits. For 2024, the limit is $4,150 for self-only coverage and $8,300 for family coverage. These limits change each year. If you are 55 or older, you can contribute an extra $1,000 per year (called a catch-up contribution). You must make contributions during the year you are enrolled in an HDHP; you cannot retroactively fund an HSA for a year you were not covered.

If you enroll in an HDHP partway through the year, you can still contribute a full year's worth if you remain enrolled through December 31 and the following March 31 — this is called the testing period. If you drop the HDHP before March 31, you must repay any excess contributions and pay taxes plus a 6 percent penalty on the overage.

What you can spend HSA money on

may have access to medical expenses include most healthcare costs: deductibles, copays, coinsurance, prescription drugs, dental work, vision care, hearing aids, and mental health treatment. You can use HSA funds to pay for your spouse or dependents' medical expenses even if they are not on your HDHP. You can also pay for over-the-counter medications (like pain relievers or allergy medicine) if you have a prescription or a doctor's written order.

Expenses that do not may have access to include cosmetic surgery, gym memberships, vitamins (unless prescribed), and most over-the-counter items without a prescription. Long-term care insurance premiums may have access to up to an IRS limit, and you can use HSA money to pay Medicare premiums (Part B, Part D, and supplemental insurance) once you turn 65.

You do not have to spend the money in the year you contribute it. Unlike an FSA, HSA balances roll over indefinitely. If you have $3,000 left at the end of the year, it stays in your account and earns interest or investment returns.

How to access and withdraw money

HSA providers issue a debit card, checks, or online transfer options so you can pay medical providers directly from the account. Some providers let you submit receipts after you pay out of pocket and request reimbursement. Keep all receipts and medical bills — the IRS can audit HSA withdrawals up to seven years later, and you must prove the expense was may have access to.

You can withdraw money at any time for any reason, but withdrawals for non-medical expenses trigger taxes and penalties. Before age 65, a non-medical withdrawal is taxed as ordinary income plus a 20 percent penalty. After age 65, non-medical withdrawals are taxed as ordinary income only (no penalty), so the account becomes a general retirement savings tool at that point.

If you leave your job, your HSA stays with you. You own it outright, not your employer. You can move it to a different HSA provider, invest the balance, or simply leave it where it is. Some employers offer HSA custodians (like Fidelity or HealthEquity); you can often transfer to a provider of your choice.

How an HDHP deductible works with an HSA

An HDHP has a higher deductible than a traditional health plan — for 2024, the minimum deductible is $1,600 for individual coverage and $3,200 for family coverage. You pay all medical costs up to that deductible out of pocket (or from your HSA). Once you meet the deductible, your insurance starts to pay its share.

The HSA is designed to help you cover that deductible. You contribute money to the HSA, and when you have a medical expense, you pay it with HSA funds. This way, you are using pre-tax money to cover costs that insurance does not yet cover. After you meet the deductible, you still have copays and coinsurance, which you can also pay from the HSA.

Some employers contribute to your HSA to help offset the higher deductible. For example, an employer might contribute $1,000 to your HSA when you enroll in their HDHP. This reduces the amount you need to save out of pocket.

Investment options and growth

Many HSA providers let you invest your balance in mutual funds, stocks, bonds, or money market funds, similar to a 401(k). The money grows tax-free, and you pay no tax when you withdraw it for medical expenses. This makes an HSA a powerful long-term savings tool — some people use it as a retirement account by paying medical expenses out of pocket and letting the HSA balance grow for decades.

Not all HSA providers offer investment options. Some keep balances in a savings account earning a small interest rate. Check your provider's website or call to see what options are available. If your current provider does not offer investments and you want them, you can transfer your HSA to a provider that does.

Investment returns are not may provide, and you can lose money if the market declines. However, you can choose conservative investments (like money market funds) if you want lower risk.

HSA portability and what happens when you change jobs or retire

Your HSA is yours to keep. If you leave your job, change insurance, or retire, the account remains open and the money stays in it. You do not forfeit unused funds, and there is no time limit to spend the money.

If you retire before age 65 and are no longer enrolled in an HDHP, you can no longer contribute to the HSA, but you can still withdraw money for may have access to medical expenses. Once you turn 65 and enroll in Medicare, you can continue to use HSA funds for Medicare premiums and may have access to medical expenses. After 65, you can also withdraw money for any reason without the 20 percent penalty (though non-medical withdrawals are still taxed as income).

If you die, your HSA passes to your beneficiary. If the beneficiary is your spouse, they can treat it as their own HSA. If the beneficiary is anyone else, they must withdraw the balance and pay income tax on it (unless the expense was a may have access to medical expense incurred before your death).

Frequently Asked Questions

Can I use my HSA to pay for my spouse's medical expenses?

Yes. You can use HSA funds to pay for your spouse's or dependent's medical expenses even if they are not enrolled in your HDHP. Keep receipts showing the expense and the person it was for, in case the IRS asks.

What happens if I withdraw money from my HSA for something that is not medical?

Before age 65, you pay income tax on the withdrawal plus a 20 percent penalty. After age 65, you pay only income tax, no penalty. For example, a $1,000 non-medical withdrawal at age 50 might cost you $220 to $320 in taxes and penalty, depending on your tax bracket.

Can I have an HSA and a 401(k) at the same time?

Yes. An HSA and a 401(k) are separate accounts with separate contribution limits. You can contribute to both in the same year. However, you cannot have an HSA and a traditional FSA at the same time — you must choose one or the other.

What if I enroll in an HDHP partway through the year?

You can contribute a full year's worth of HSA funds if you enroll by December 1 and stay enrolled through March 31 of the following year. If you drop the HDHP before March 31, you must repay excess contributions and pay a 6 percent penalty on the overage.

Can I transfer my HSA to a different provider?

Yes. You can move your HSA to a different bank or investment provider at any time. Contact your current provider for a transfer form. The process usually takes one to two weeks. You can do this as many times as you want, though some providers charge a small fee.