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

An HSA (Health Savings Account) is a savings account you own that holds money specifically for medical expenses. The account belongs to you — not your employer or insurance company — and the money stays in the account even if you change jobs or insurance plans. You can contribute money to it before taxes are taken out of your paycheck, which lowers your taxable income for the year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). This is a type of health insurance with a lower monthly premium but a higher deductible — the amount you pay out of pocket before insurance starts to pay. The IRS sets minimum deductible amounts each year; for 2024, the minimum is $1,600 for individual coverage and $3,200 for family coverage. You cannot have an HSA if you are covered by any other health insurance, Medicare, or claimed as a dependent on someone else's tax return.

Key Takeaways

  • You can only open an HSA if you have a high-deductible health plan, and the account is yours to keep even if you change jobs or insurance.
  • Money you put into an HSA is not taxed when you contribute it, and withdrawals for medical expenses are not taxed either.
  • You can use HSA funds to pay for a wide range of medical, dental, vision, and mental health expenses, including deductibles, copays, and prescriptions.
  • Any money left in your HSA at the end of the year rolls over to the next year — there is no "use it or lose it" rule like some other health accounts.
  • After age 65, you can withdraw money from your HSA for any reason without penalty, though non-medical withdrawals are taxed as income.

How contributions and tax treatment work

You can contribute money to your HSA in two ways: through payroll deductions (if your employer offers it) or by depositing money directly into the account yourself. For 2024, the IRS allows you to contribute up to $4,150 per year for individual coverage or $8,300 for family coverage. These limits change annually. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

The money you contribute is not subject to federal income tax or Social Security and Medicare taxes (FICA). This means if you earn $50,000 and contribute $3,000 to your HSA, you only pay income tax on $47,000. Your employer may also contribute to your HSA, and that money is not taxed to you either. When you withdraw money from your HSA to pay for medical expenses, that withdrawal is also tax-free.

If you withdraw money from your HSA for something other than a 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, though non-medical withdrawals are taxed as ordinary income.

What medical expenses you can pay for with HSA funds

HSA funds can cover a broad range of health-related costs. You can use the money to pay your insurance deductible, copays, and coinsurance. You can also pay for prescription medications, over-the-counter drugs (with a doctor's prescription), dental work, vision care, mental health treatment, and medical equipment like hearing aids or blood pressure monitors.

Less obvious expenses also may have access to: physical therapy, chiropractic care, acupuncture, weight-loss programs prescribed by a doctor, and certain home modifications for medical reasons (like installing a ramp for mobility). You cannot use HSA funds to pay insurance premiums, except for COBRA continuation coverage, long-term care insurance, or health insurance while you are receiving unemployment benefits.

The IRS publishes a detailed list of what counts as a medical expense. If you are unsure whether something qualifies, you can ask your HSA provider or check IRS Publication 502. Keeping receipts and documentation is important because if you are audited, you may need to prove that your withdrawals were for medical expenses.

How HSA accounts are managed and where the money goes

Your HSA is held by a bank, credit union, or other financial institution that the IRS has approved to administer HSAs. Your employer may choose the provider, or you may be able to select one yourself. The account works similarly to a checking or savings account — you receive a debit card or checkbook to access the funds, and you can see your balance online.

Some HSA providers allow you to invest unused funds in stocks, bonds, or mutual funds, similar to a retirement account. Others keep the money in a savings account earning interest. The investment options and interest rates vary by provider, so it is worth comparing before you open an account. Any earnings on the money in your HSA are not taxed as long as you use the funds for medical expenses.

Unlike a Flexible Spending Account (FSA), which is a "use it or lose it" account, money left in your HSA at the end of the year carries over to the next year. You can accumulate funds over time and use them whenever you need to pay for medical expenses, even years later. This makes an HSA a tool for long-term savings as well as immediate medical costs.

The relationship between your HSA and your high-deductible health plan

Your HSA is separate from your insurance plan, but the two work together. The high deductible on your insurance plan is the amount you pay out of pocket before your insurance starts to cover costs. Your HSA is designed to help you pay that deductible and other medical expenses. For example, if your deductible is $2,000 and you have surgery that costs $3,000, you would use your HSA to pay the $2,000 deductible, and your insurance would cover the remaining $1,000.

If you lose your high-deductible health plan coverage — for example, because you change jobs and enroll in a different type of insurance — you can no longer make new contributions to your HSA. However, you keep the account and the money in it, and you can continue to withdraw funds for medical expenses. The account is yours permanently.

How HSAs differ from other health savings accounts

An HSA is different from a Flexible Spending Account (FSA), even though both are used to pay medical expenses with pre-tax money. An FSA has a "use it or lose it" rule — any money you do not spend by the end of the year is forfeited, though some employers allow a grace period or a small carryover. An HSA has no such limit; your money rolls over indefinitely.

An FSA also does not require a high-deductible health plan. You can have an FSA with any type of health insurance. However, if you have an FSA, you cannot have an HSA in the same year. A Dependent Care FSA (used for childcare expenses) is separate and can be used alongside an HSA.

A Health Reimbursement Arrangement (HRA) is another employer-sponsored account for medical expenses, but it is owned by your employer, not by you. When you leave the job, you typically lose access to any remaining balance. An HSA is portable and belongs to you.

Frequently Asked Questions

Can I have an HSA if I am on Medicare?

No. Once you enroll in Medicare, you are no longer may be able to access to contribute to an HSA. If you already have an HSA, you can keep the account and withdraw money from it for medical expenses, but you cannot add new money to it. You should stop making contributions the month you become may be able to access for Medicare.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is not tied to your employer — it is your personal account. You can continue to use the money for medical expenses and can keep contributing if your new employer offers a high-deductible health plan with an HSA option. If your new job does not offer an HSA, you can still keep your existing account and withdraw from it.

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

Yes, as long as your spouse is not covered by any other health insurance. If you have family coverage on your high-deductible health plan, you can use your HSA to pay for medical expenses for yourself, your spouse, and your dependents. You do not need to be on the same insurance plan.

Do I have to file anything with my taxes to report HSA contributions and withdrawals?

Yes. Your HSA provider sends you a Form 1099-SA each year showing the total amount you withdrew from the account. You report this on your tax return. If you made contributions through payroll, those appear on your W-2. If you made direct contributions, you report them on Form 8889 when you file your taxes. Keeping records of what you spent the money on is important in case the IRS asks for documentation.

Can I withdraw money from my HSA to pay for health insurance premiums?

You can use HSA funds to pay for COBRA continuation coverage (health insurance you can keep after leaving a job), long-term care insurance, or health insurance premiums while you are receiving unemployment benefits. You cannot use HSA funds to pay regular health insurance premiums, including premiums for your high-deductible health plan itself.