A Health Savings Account is a tax-advantaged savings account tied to a high-deductible health insurance plan

A Health Savings Account (HSA) is a savings account you own and control that lets you set aside money for medical expenses before taxes are taken out. You can only open one if you're enrolled in a high-deductible health plan (HDHP) — a type of insurance with lower monthly premiums but higher out-of-pocket costs before coverage kicks in. The money you put in reduces your taxable income, and any money you don't spend stays in the account and grows year to year.

Unlike a flexible spending account (FSA), which is also tied to your job's health plan, an HSA belongs to you. If you change jobs or retire, you keep the account and the money in it. You can invest the balance, and withdrawals for medical expenses are tax-free.

Key Takeaways

  • You must be enrolled in a high-deductible health plan to open an HSA, and you cannot have other health coverage or use Medicare.
  • Money you contribute is not subject to federal income tax, and withdrawals for may have access to medical expenses are tax-free.
  • The account stays with you if you change jobs, and unused money rolls over every year with no "use it or lose it" deadline.
  • You can withdraw money for non-medical expenses, but you'll owe income tax plus a 20 percent penalty if you're under 65.
  • may have access to expenses include deductibles, copays, prescriptions, dental work, vision care, and some medical equipment, but not insurance premiums or cosmetic procedures.

Who can open an HSA and what the income limits are

You can open an HSA if you are covered by a high-deductible health plan and meet three conditions: you have no other health coverage (with narrow exceptions for accident, disability, dental, or vision plans), you are not claimed as a dependent on someone else's tax return, and you are not enrolled in Medicare. Self-employed people, employees, and people buying plans on the individual market can all open one.

There are no income limits to open an HSA. However, the amount you can contribute each year is capped. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change yearly and are set by the IRS. If you're 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

Your employer may contribute to your HSA as part of your benefits package, and that money counts toward your annual limit. If you open an HSA mid-year, your contribution limit is reduced proportionally based on the number of months you were covered by an HDHP.

What counts as a may have access to medical expense

Withdrawals from your HSA are tax-free only if you use the money for may have access to medical expenses. These include deductibles, copayments, and coinsurance for any health plan; prescription medications and insulin; dental work like fillings, crowns, and orthodontia; vision care including glasses, contacts, and eye exams; hearing aids and batteries; and durable medical equipment like crutches, wheelchairs, and blood pressure monitors.

Some less obvious expenses also count: over-the-counter medications (including pain relievers, allergy medicine, and cold medicine), therapy and mental health counseling, physical therapy, chiropractic care, acupuncture, and certain medical devices prescribed by a doctor. Long-term care insurance premiums and some long-term care services are covered, with limits.

Expenses that do not count include health insurance premiums (with exceptions for COBRA continuation coverage, Medicare premiums if you're 65 or older, and long-term care insurance up to a limit), cosmetic procedures, gym memberships, vitamins and supplements not prescribed by a doctor, and over-the-counter items not classified as drugs or medical devices.

How to use your HSA and track your spending

Most HSAs come with a debit card you can use at pharmacies, doctors' offices, and hospitals. Some accounts require you to pay out of pocket and then request reimbursement by submitting receipts. You can also withdraw money directly from the account and use it however you choose, though only medical expenses are tax-free.

You are responsible for keeping records of what you spent and confirming it was a may have access to expense. The IRS does not require you to submit receipts when you withdraw money, but you must be able to produce them if audited. Many HSA providers offer online portals or apps where you can upload receipts and track your balance.

If you withdraw money for a non-medical expense before age 65, you owe income tax on that amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty — you'll owe income tax only on non-medical withdrawals, just like a regular retirement account.

How an HSA differs from an FSA and other savings accounts

A flexible spending account (FSA) is also tied to your employer's health plan and lets you set aside pre-tax money for medical expenses. The key difference is that FSAs have a "use it or lose it" rule: money you don't spend by the end of the year is forfeited, though some plans allow a $610 carryover (as of 2024). An HSA has no deadline — unused money stays in your account forever and can be invested.

An FSA is also tied to your job. If you leave your employer, you lose the account. An HSA is portable: you own it and keep it no matter where you work. You can also invest HSA funds in stocks, bonds, and mutual funds, whereas FSA money typically sits in a cash account.

A dependent care FSA is a separate account for childcare expenses and works under the same use-it-or-lose-it rule. A Coverdell Education Savings Account is for education expenses, not medical ones. A regular savings account offers no tax advantage for medical spending.

What happens to your HSA if you change jobs or lose coverage

Your HSA is yours to keep. If you leave your job, the account and all the money in it remain yours. You can continue to use it for medical expenses and make new contributions as long as you stay enrolled in an HDHP, even if it's a plan you buy on your own.

If you lose your HDHP coverage and switch to a different type of health plan, you can no longer make new contributions to your HSA. However, you can still withdraw money from the account for may have access to medical expenses without penalty. Once you re-enroll in an HDHP, you can resume contributions.

If you become may be able to access for Medicare, you must stop contributing to your HSA. You can still withdraw money for may have access to medical expenses, and after age 65, you can withdraw money for any reason without the 20 percent penalty (though non-medical withdrawals are taxed as income).

Tax benefits and how they work on your return

The main tax benefit of an HSA is that contributions reduce your taxable income. If your employer deducts contributions from your paycheck, they're taken out before taxes are calculated, so you see the benefit immediately. If you contribute on your own, you deduct the contribution on your tax return (Form 1040, Schedule 1).

Withdrawals for may have access to medical expenses are not taxed. If you withdraw money for non-medical expenses before age 65, you owe income tax plus a 20 percent penalty on that amount. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals.

Your HSA provider will send you a Form 1099-SA each year showing how much you withdrew. You'll report this on your tax return along with any contributions you made outside of payroll. Keep receipts for all medical expenses you paid for with HSA money in case the IRS asks.

Frequently Asked Questions

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

Yes. Your spouse does not need to be on your health plan. As long as you're married and file taxes jointly, you can use your HSA to pay for your spouse's may have access to medical expenses. You can also use it for your children and any dependents you claim on your tax return.

What happens if I withdraw money and later find out it wasn't a may have access to expense?

You'll owe income tax on that amount plus the 20 percent penalty if you're under 65. You cannot undo the withdrawal, but you can correct it by reporting the error on your tax return. Keep documentation of what you spent in case you need to explain it to the IRS.

Can I have both an HSA and an FSA at the same time?

No. If you have an HSA, you cannot have a general-purpose FSA. You can have a dependent care FSA (for childcare) or a limited-purpose FSA (for dental and vision only) alongside an HSA, but not a regular FSA.

Do I have to spend my HSA money every year?

No. Unlike an FSA, there is no deadline to spend HSA money. You can let it grow year after year and use it whenever you need it. After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as income.

What if my employer contributes to my HSA but I leave the job mid-year?

You keep the money your employer contributed. However, some employers require you to repay contributions if you leave during the year. Check your plan documents or ask your benefits administrator about this rule before you leave.