An HSA is a savings account you own, paired with a high-deductible health plan

A Health Savings Account (HSA) is a tax-advantaged savings account designed to hold money specifically for medical expenses. You can only open one if you are enrolled in a high-deductible health plan (HDHP) — a health insurance plan with a higher annual deductible than standard plans. The account belongs to you, not your employer or insurance company, and you keep it even if you change jobs or health plans.

The account works in three parts: money goes in (through payroll deduction, employer contribution, or your own deposit), money stays invested and grows tax-free, and money comes out when you pay for medical care. Unlike a flexible spending account (FSA), which you lose if you do not spend it by year-end, an HSA rolls over indefinitely. Any balance you do not use stays in the account and earns interest or investment returns.

Key Takeaways

  • You must be enrolled in a high-deductible health plan to open and contribute to an HSA; without the HDHP, the account closes or you cannot add money.
  • Money deposited into an HSA is not subject to federal income tax, and withdrawals for medical expenses are also tax-free.
  • You can withdraw money for any may have access to medical expense — copays, deductibles, prescriptions, dental work, vision care, and many other costs — without a receipt requirement at the time of withdrawal.
  • Unused HSA money rolls over year to year and can be invested in stocks, bonds, or mutual funds to grow beyond the deposit amount.
  • 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.

Who can open an HSA and when

You are may be able to access to open an HSA only if you are covered by a high-deductible health plan. For 2024, the IRS defines an HDHP as a plan with a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. Your plan documents will state whether it qualifies; if you are unsure, ask your employer's benefits administrator or your insurance company directly.

You cannot have other health coverage at the same time — no spouse's standard plan, no Medicare, no Medicaid, no TRICARE. You also cannot claim yourself as a dependent on someone else's tax return. If any of these apply to you, you are ineligible until that coverage ends or the dependent status changes.

You can open an HSA through your employer (if they offer one), through a bank or financial institution, or through a health insurance marketplace. Employer-sponsored HSAs are common and often come with a debit card for easy spending. If your employer does not offer one, you can open an individual HSA at most banks, credit unions, or investment firms.

How money gets into your HSA

Money enters an HSA in three ways: payroll deduction, employer contribution, or your own deposit. If your employer offers an HSA, they typically set up payroll deduction so money moves from your paycheck into the account before taxes are calculated. This reduces your taxable income for the year.

Your employer may also contribute money directly to your HSA as part of your benefits package. This is common and counts toward the annual contribution limit. Some employers contribute a flat amount; others match a percentage of what you contribute.

You can also deposit your own money into an HSA outside of payroll, either as a lump sum or over time. These deposits must be made by the tax filing deadline (usually April 15) to count toward that tax year's contribution limit. Self-employed people and those without employer plans often use this route.

Annual contribution limits and how they work

The IRS sets a maximum amount you can deposit into an HSA each year. For 2024, the limit is $4,150 for individual coverage or $8,300 for family coverage. If you are age 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits change annually and are announced by the IRS each October.

The limit applies to all your HSA contributions combined — payroll deductions, employer contributions, and personal deposits all count toward the same ceiling. If your employer contributes $2,000 and you contribute $1,500, you have used $3,500 of your $4,150 limit and can contribute $650 more that year.

If you enroll in an HDHP partway through the year, you can still contribute the full annual amount (or a prorated amount, depending on your plan). If you lose HDHP coverage during the year, you can no longer contribute for that year, but money already in the account stays there.

What you can spend HSA money on

HSA funds can pay for any medical expense that would be deductible on your federal tax return. This includes copays, coinsurance, deductibles, and out-of-pocket costs for doctor visits, hospital stays, surgery, and emergency care. Prescription medications, insulin, and other drugs covered by the IRS may have access to. Dental work, orthodontia, vision care, and hearing aids also count.

Less obvious expenses that may have access to include mental health counseling, physical therapy, chiropractic care, acupuncture, and certain over-the-counter medications (like pain relievers and allergy medicine, though not all OTC items). Medical equipment such as crutches, wheelchairs, blood pressure monitors, and glucose meters is covered. You can also use HSA funds to pay health insurance premiums in specific situations: COBRA continuation coverage, premiums while you are unemployed, and long-term care insurance premiums.

Expenses that do not may have access to include cosmetic procedures, gym memberships, vitamins (unless prescribed for a specific condition), and general wellness products. Teeth whitening, hair transplants, and most elective procedures are not covered. If you are unsure whether a specific expense qualifies, the IRS publishes a detailed list, or you can ask your HSA provider.

How to withdraw money and what records you need

You withdraw money from an HSA by writing a check, using a debit card (if your provider issues one), or requesting a transfer to your bank account. Many employer-sponsored HSAs come with a debit card that works like a regular card at pharmacies, doctor offices, and hospitals. Some cards require you to submit a receipt after purchase to confirm the expense was medical; others do not.

You do not need to submit receipts at the time of withdrawal, but you must keep them for your records. The IRS can audit your HSA and ask you to prove that withdrawals were for may have access to medical expenses. If you cannot document a withdrawal, it is treated as a non-medical withdrawal and you owe income tax plus a 20 percent penalty on that amount.

Keep receipts, explanation of benefits (EOB) statements from your insurance, and invoices from providers for at least three to seven years. Digital copies are acceptable. If you use the HSA debit card, match each transaction to a receipt or EOB to create a clear record.

What happens to money you do not spend

Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. Any balance remaining at the end of the year stays in your account and is available to use in future years. This makes an HSA a long-term savings tool, not just a spending account for the current year.

Many HSA providers allow you to invest your balance in stocks, bonds, mutual funds, or other securities, similar to a retirement account. This means your HSA can grow through both contributions and investment returns. Some providers require a minimum balance (often $1,000 or $2,000) before you can invest; below that, the money sits in a cash account earning little or no interest.

If you leave your job or change health plans, your HSA stays with you. The account does not close, and you keep the money. However, once you are no longer enrolled in an HDHP, you cannot make new contributions. You can still withdraw money for medical expenses tax-free, and any balance can remain invested.

What happens if you withdraw money for non-medical expenses

If you withdraw HSA money for something other than a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty — but only if you are under age 65. This makes non-medical withdrawals expensive and is why it is important to keep good records.

After age 65, the penalty goes away. You can withdraw money for any reason and pay only income tax on non-medical withdrawals, similar to a traditional IRA. This makes an HSA a useful retirement savings tool: you can use it for medical expenses tax-free throughout your life, and after 65 you can use it like a regular retirement account.

If you accidentally withdraw money for a non-medical expense, some HSA providers allow you to return the money within a certain timeframe to avoid the penalty. Check your plan documents or contact your provider to see if this option is available.

Frequently Asked Questions

Can I use my HSA if I change jobs or lose my HDHP coverage?

Yes. Your HSA belongs to you, not your employer. If you change jobs, the account moves with you and you can continue to withdraw money for medical expenses. If you lose HDHP coverage, you can no longer contribute new money, but existing funds stay in the account and remain available for medical expenses.

What if my employer contributes to my HSA but I do not use all the money?

The money rolls over to the next year and stays in your account indefinitely. You do not lose it. If you change jobs, the balance comes with you. Employer contributions count toward your annual limit, so if your employer contributes $2,000, you can only contribute $2,150 more (assuming a $4,150 individual limit).

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

Yes, as long as your spouse is not covered by a separate health plan that would make them ineligible. You can use your HSA to pay for any family member's may have access to medical expenses, including children, parents, and in-laws — even if they are not on your health insurance plan.

Do I have to spend my HSA money by a certain date each year?

No. HSA money does not expire. Unlike an FSA, which typically has a use-it-or-lose-it deadline of December 31, an HSA balance carries over indefinitely. You can accumulate money over many years and use it whenever you have medical expenses.

What if I inherit an HSA from a spouse or family member?

If your spouse had an HSA and you inherit it, you can treat it as your own HSA and continue to use it for medical expenses. If a non-spouse family member had an HSA and you inherit it, the rules are different and the inherited amount is treated as income. Consult a tax professional for guidance on inherited HSAs.