An HSA plan lets you set aside pre-tax money to pay for medical expenses, and any balance you don't spend rolls over to the next year
A Health Savings Account (HSA) is a savings account attached to a high-deductible health insurance plan. You put money into it before taxes are taken out of your paycheck, use it to pay for medical costs, and keep whatever you don't spend. Unlike a flexible spending account (FSA), the money does not disappear at the end of the year — it stays in your account and grows.
The account works in three parts: money goes in through payroll deductions or direct deposits, you withdraw it to pay for medical bills, and any leftover balance sits there earning interest or investment returns. You control the account, not your employer or insurance company, so the money is yours even if you change jobs or leave your employer.
Key Takeaways
- You must be enrolled in a high-deductible health plan (HDHP) to open an HSA, and you cannot have other health coverage like Medicare or a spouse's plan that is not also an HDHP.
- Money you contribute reduces your taxable income, and withdrawals for medical expenses are not taxed, but withdrawals for non-medical expenses are taxed as income plus a 20 percent penalty.
- You can contribute up to $4,150 per year if you have individual coverage or $8,300 if you have family coverage (2024 limits; these amounts change yearly).
- The account balance rolls over every year and earns interest or investment returns, so money you do not spend today is still there in five years or ten years.
- You can use HSA money to pay for deductibles, copays, prescriptions, dental work, vision care, and many other medical expenses, but not for insurance premiums or over-the-counter items unless prescribed by a doctor.
Who can open an HSA and what disqualifies you
You must be enrolled in a high-deductible health plan (HDHP) to open an HSA. For 2024, an HDHP has a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. Your employer may offer an HDHP during open enrollment, or you can buy one through the health insurance marketplace in your state.
You cannot have an HSA if you are covered by Medicare, enrolled in a spouse's health plan that is not an HDHP, or claimed as a dependent on someone else's tax return. You also cannot have an FSA or Health Reimbursement Arrangement (HRA) at the same time, though some employers offer both and let you choose one. If you lose HDHP coverage during the year, you can no longer contribute to the HSA for that year, but you keep the money already in the account.
How much you can contribute each year
The IRS sets annual contribution limits, and they change each year. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits apply to all contributions combined — from your paycheck, from your employer, and from you directly.
You contribute money through payroll deduction, which means it comes out of your paycheck before federal income tax is calculated. If you are self-employed or your employer does not offer an HSA, you can open one on your own and contribute directly. Contributions for the current year can be made until the tax filing deadline (usually April 15 of the following year), though payroll contributions must stop by December 31.
What you can and cannot buy with HSA money
You can use HSA funds to pay for most medical expenses: deductibles, copays, coinsurance, prescriptions, dental work, vision care, hearing aids, mental health treatment, and physical therapy. You can also pay for medical equipment like crutches, wheelchairs, or blood pressure monitors. The IRS maintains a detailed list, but the basic rule is that the expense must be for diagnosis, treatment, or prevention of a disease or condition.
You cannot use HSA money for health insurance premiums (except COBRA or premiums while you are unemployed and receiving unemployment benefits), over-the-counter medications unless a doctor prescribes them, cosmetic procedures, gym memberships, or vitamins. You also cannot use it for long-term care insurance or most dental or vision insurance premiums, though there are narrow exceptions. If you withdraw money for a non-medical expense before age 65, you pay income tax on the amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, but you still pay income tax on non-medical withdrawals.
How to access your money and pay for medical bills
Most HSAs come with a debit card that you can use at pharmacies, doctors' offices, and hospitals. You swipe it like a regular card, and the money comes out of your HSA balance. Some providers also let you submit receipts online or by mail to request a reimbursement check. A few accounts require you to pay out of pocket and then request reimbursement later — this is less common but still happens.
Keep all receipts and medical bills. If you use the debit card, the provider may ask you to prove the charge was for a medical expense. If you request reimbursement, you will need to show the receipt. The IRS can audit HSA accounts, and you must be able to document that withdrawals were for medical expenses. You can also leave money in the account and not withdraw it — there is no requirement to spend it in any timeframe.
How the money grows and what happens to unused balances
Any balance in your HSA at the end of the year stays in the account. Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. Many HSA providers let you invest the balance in mutual funds or other investments, similar to a retirement account. The money can earn interest or investment returns, which also grow tax-free as long as you use the withdrawals for medical expenses.
If you change jobs, the HSA stays with you. You own the account, not your employer, so you can take it to a new job, a new employer's plan, or keep it on your own. Some employers match contributions (like a 401(k) match), but this is optional and varies by company. If you lose HDHP coverage, you cannot contribute new money, but the balance remains in the account and you can still withdraw it for medical expenses.
What happens to your HSA if you retire or turn 65
At age 65, you become ineligible to contribute new money to an HSA because you become may be able to access for Medicare. However, you keep the account and can continue to withdraw money for medical expenses without the 20 percent penalty. After 65, if you withdraw money for non-medical reasons, you pay income tax but no penalty — making the HSA function like a retirement account at that point.
If you die, the HSA passes to your beneficiary (usually your spouse or estate). A surviving spouse can treat the HSA as their own and continue using it. Other beneficiaries must pay income tax on the full balance, though they do not pay the 20 percent penalty. You name a beneficiary when you open the account, so make sure that information is current.
Frequently Asked Questions
Can I use HSA money to pay my insurance deductible?
Yes. Your deductible is a medical expense, so you can use HSA funds to pay it. This is one of the main reasons people open HSAs — to have pre-tax money set aside for the deductible before you meet it.
What if I do not spend all my HSA money in a year?
The money stays in your account and rolls over to the next year. There is no deadline to spend it, and no penalty for leaving it there. You can let it accumulate for years and use it whenever you have medical expenses.
Can I withdraw HSA money for my spouse's medical expenses?
Yes, as long as your spouse is not covered by their own health insurance plan. If your spouse has separate coverage, they would need their own HSA to use pre-tax money for their expenses. Check with your HSA provider about the rules for your specific account.
What happens to my HSA if I switch to a different health plan that is not an HDHP?
You keep the account and the balance, but you cannot contribute new money. You can still withdraw funds for medical expenses. If you switch back to an HDHP later, you can resume contributions.
Do I have to file anything with my taxes for my HSA?
Yes. If you contributed through payroll, your employer reports it on your W-2. If you contributed directly or your employer did not report it, you file Form 8889 with your tax return. Keep records of all medical expenses you paid for with HSA money in case of an audit.