What HSA Stands For and How It Works

HSA stands for Health Savings Account

An HSA is a savings account you own that holds money specifically for medical expenses. Unlike a regular bank account, an HSA has tax advantages: the money you put in is not taxed, the money grows without being taxed, and you can withdraw it tax-free as long as you spend it on medical costs. You control the account — not your employer, not your insurance company — and the money stays yours even if you change jobs or leave your employer.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP), a type of health insurance with a lower monthly premium but a higher deductible. The IRS sets the minimum deductible each year; for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. If your plan meets that threshold, you become may be able to access to open an HSA through your employer, a bank, or an insurance company.

Key Takeaways

An HSA is a tax-advantaged savings account you own personally, separate from your health insurance plan.
You can only open an HSA if you are enrolled in a high-deductible health plan, which the IRS defines by minimum deductible amounts that change yearly.
Money in an HSA can be used to pay for medical, dental, vision, and prescription costs, as well as some over-the-counter items with a doctor's note.
You decide how much to contribute each year (up to an IRS limit), and unused money rolls over to the next year instead of disappearing.

How contributions and withdrawals work

You contribute money to your HSA on a pre-tax basis, meaning the amount comes out of your paycheck before income tax is calculated. If your employer offers an HSA, they usually deduct contributions directly from your pay. If you open an HSA on your own, you can contribute the same amount but claim a tax deduction when you file your tax return. The IRS sets an annual contribution limit; for 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage.

When you need to pay for a medical expense, you withdraw money from your HSA account. You can use a debit card linked to the account, write a check, or transfer money to your bank. The withdrawal is tax-free as long as you use it for a may have access to medical expense. If you withdraw money for something that is not a medical expense, you pay income tax on that amount plus a 20 percent penalty — so it is important to keep receipts and track what you spend.

What counts as a may have access to medical expense

may have access to expenses include doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, and mental health treatment. Some over-the-counter items like pain relievers, allergy medicine, and bandages count if you have a written prescription or doctor's note. Expenses for your spouse and dependents also count, even if they are not on your health insurance plan.

Expenses that do not count include cosmetic procedures, gym memberships, vitamins without a medical reason, and most over-the-counter items without a prescription. If you are unsure whether something qualifies, the IRS publishes a full list on its website, and your HSA provider can also answer questions about specific items.

How an HSA differs from an FSA

A Flexible Spending Account (FSA) is similar to an HSA but works differently in important ways. An FSA is also a tax-advantaged account for medical expenses, but you do not own it — your employer does. If you leave your job, you lose the FSA. More importantly, FSAs have a "use it or lose it" rule: any money you do not spend by the end of the year is forfeited, though employers can allow a short grace period or let you carry over a small amount.

An HSA has no use-it-or-lose-it rule. Money rolls over year after year, and you can let it grow like a regular savings account. You also own the account and can take it with you if you change jobs. For these reasons, an HSA is often better for long-term savings, while an FSA works better if you have predictable medical expenses each year and want to use all the money you set aside.

How an HSA can be used as a retirement account

After age 65, you can withdraw money from your HSA for any reason without penalty, though you will pay income tax on non-medical withdrawals. This makes an HSA a powerful retirement tool: if you do not need the money for medical expenses while you are working, you can let it grow and use it in retirement. Some people treat their HSA as a second retirement account, similar to an IRA, because the tax advantages are so strong.

If you use HSA money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty. After 65, the penalty goes away but income tax remains. This is why many people keep receipts for medical expenses even if they do not withdraw the money right away — you can reimburse yourself from your HSA years later, as long as you have proof the expense was may have access to.

Who can and cannot open an HSA

You can open an HSA only if you are enrolled in a high-deductible health plan. You cannot have an HSA if you are on Medicare, covered by a spouse's non-HDHP plan, or claimed as a dependent on someone else's tax return. Some people are enrolled in an HDHP through their employer but choose not to open an HSA; that is allowed, but you lose the tax advantage.

If you are self-employed or work for a small employer that does not offer an HSA, you can open one on your own through a bank or insurance company, as long as you have an HDHP. The contribution limits and rules are the same whether your employer sponsors the account or you open it independently.

Frequently Asked Questions

What happens to my HSA if I leave my job?

Your HSA stays with you. The account is yours, not your employer's. You can keep the account open, continue to use the money for medical expenses, and even keep contributing if you have an HDHP through another source. Some people move their HSA to a different bank or provider for better investment options or lower fees.

Can I invest HSA money like a retirement account?

Yes. Many HSA providers let you invest the money in stocks, bonds, or mutual funds, similar to a 401(k) or IRA. You can also keep it in a savings account earning interest. The investment earnings are tax-free as long as you use the money for medical expenses eventually.

Do I have to use my HSA every year?

No. Unlike an FSA, an HSA has no deadline to spend the money. You can let it accumulate year after year. This makes it useful for saving toward future medical costs or retirement.

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

Yes. Your spouse's medical expenses count as may have access to expenses even if they are not on your health insurance plan. The same rule applies to your dependents.

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

You will owe income tax on the amount withdrawn plus a 20 percent penalty. After age 65, the penalty is waived but income tax still applies. This is why it is important to keep receipts and track your spending.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.