How Health Savings Accounts Work and What They Cover

What an HSA plan is

A Health Savings Account (HSA) is a savings account you own that holds money specifically for medical expenses. To open one, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but a higher deductible, meaning you pay more out of pocket before insurance kicks in. The HSA lets you set aside pre-tax money to cover those out-of-pocket costs.

Unlike a flexible spending account (FSA), which is tied to your employer and you lose unused money at the end of the year, an HSA belongs to you. The money stays in the account year after year, and you can take it with you if you change jobs. You control how much to contribute (within annual limits set by the IRS), what medical expenses to pay from it, and when to withdraw the money.

HSAs are offered through employers, banks, and insurance companies. If your employer offers one, they may contribute money to your account as part of your benefits package. You can also open an HSA independently through a bank or financial institution if you have an HDHP through the individual market or a spouse's plan.

Key Takeaways

• You can only open an HSA if you are enrolled in a high-deductible health plan; having other health coverage (except certain exceptions like dental or vision) disqualifies you.
• Contributions are made with pre-tax money, meaning you reduce your taxable income for the year, and the money grows tax-free as long as it stays in the account.
• You can withdraw money tax-free to pay for may have access to medical expenses including deductibles, copays, prescriptions, dental work, and vision care.
• Money left in the account at the end of the year rolls over indefinitely, making an HSA different from a flexible spending account that has a use-it-or-lose-it rule.
• After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Who can open an HSA and when

You must meet three conditions to open an HSA. First, you must be enrolled in a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. Your plan's out-of-pocket maximum (the most you pay before insurance covers everything) also has an IRS limit: $8,050 for individual coverage and $16,100 for family coverage in 2024. These numbers change annually.

Second, you cannot have other health coverage that is not an HDHP. This includes Medicare, Medicaid, or a spouse's traditional health plan. There are narrow exceptions: you can have dental, vision, or accident insurance alongside an HSA without losing may be able to access.

Third, you cannot be claimed as a dependent on someone else's tax return. If you are, you cannot open an HSA even if you have an HDHP.

You can open an HSA at any time during the year, but contributions for a given tax year must be made by the tax filing important date (usually April 15 of the following year). If you enroll in an HDHP mid-year, you can still contribute to an HSA for that year, but the amount is prorated based on how many months you were covered.

How much you can contribute each year

The IRS sets annual contribution limits that 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. These limits explore to all your HSAs combined — if you have multiple accounts, the total across all of them cannot exceed the limit.

Contributions can come from you, your employer, or both. If your employer contributes, that amount counts toward your limit. You can contribute the difference yourself. For example, if your employer puts $2,000 into your HSA and the individual limit is $4,150, you can add up to $2,150 more.

If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). This extra amount is separate from the main limit and applies only to you, not to your spouse, even if you have family coverage.

Contributions are made with pre-tax money if you contribute through payroll deduction at work. If you contribute on your own, you deduct the amount on your tax return (Form 8889) when you file.

What expenses you can pay from an HSA

You can withdraw money tax-free from your HSA to pay for may have access to medical expenses — costs related to diagnosis, treatment, or prevention of disease. This includes deductibles, copays, and coinsurance on your health plan. It also covers prescription medications, insulin, and over-the-counter drugs (with a prescription from a doctor).

Dental and vision care count as may have access to expenses: cleanings, fillings, root canals, eyeglasses, contact lenses, and laser eye surgery. Mental health treatment, physical therapy, and chiropractic care are covered. So are hearing aids, medical equipment like crutches or wheelchairs, and certain home modifications for medical reasons (like a ramp for someone in a wheelchair).

Some expenses do not may have access to. Cosmetic surgery is not covered unless it is medically necessary (reconstructive surgery after an accident or injury may may have access to). Gym memberships and general wellness programs are not covered, though some preventive care is. Teeth whitening is not covered. Long-term care insurance premiums are not covered, though some long-term care expenses may be.

You do not have to use the money when ready. You can pay a medical expense out of pocket and reimburse yourself from your HSA months or years later, as long as you keep records showing the expense was incurred while you had an HSA.

Tax treatment and how money grows

Money in an HSA grows tax-free. If you invest the balance (many HSA providers offer investment options like mutual funds or stocks), any gains are not taxed as long as the money stays in the account. This is different from a regular savings account, where interest is taxed as income each year.

Withdrawals for may have access to medical expenses are never taxed — not when you take the money out, and not when you file your taxes. You do not report may have access to HSA withdrawals on your tax return.

If you withdraw money for a non-medical reason before age 65, you owe income tax on the amount plus a 20% penalty. For example, if you withdraw $1,000 for a non-medical expense and you are in the 22% tax bracket, you would owe $220 in taxes plus $200 in penalties, for a total of $420. After age 65, you can withdraw money for any reason without the 20% penalty, though non-medical withdrawals are taxed as ordinary income.

If you receive a reimbursement from insurance for an expense you already paid from your HSA, you must return that money to the HSA within a certain timeframe to avoid taxes and penalties. The IRS does not specify an exact important date, but returning it promptly is safest.

HSA vs. FSA: key differences

Both HSAs and flexible spending accounts (FSAs) let you set aside pre-tax money for medical expenses, but they work differently. An FSA is offered only through an employer and is not your property — your employer owns it. An HSA is yours to keep even if you leave your job.

FSAs have a use-it-or-lose-it rule: money left in the account at the end of the year is forfeited. Some employers offer a grace period (an extra 2.5 months to spend the balance) or allow you to carry over up to $640 into the next year (as of 2024), but these are optional. HSAs have no such rule — unused money rolls over indefinitely.

FSA contribution limits are lower: $3,300 per year in 2024. HSA limits are higher: $4,150 for individual coverage and $8,300 for family coverage in 2024. FSAs do not earn interest or investment gains. HSAs can be invested, and growth is tax-free.

You can have both an HSA and an FSA at the same time, but if you have an FSA, it must be a limited-purpose FSA (covering only dental, vision, and dependent care) to avoid disqualifying you from HSA may be able to access.

What happens to your HSA when you change jobs or retire

Your HSA stays with you when you leave your job. The account does not close, and the money does not go away. You own it, and it remains in whatever financial institution holds it (your bank, your previous employer's HSA provider, or wherever you opened it).

If you want to move the account to a different provider, you can do a trustee-to-trustee transfer, which moves the money directly without tax consequences. You can also do a rollover, where you withdraw the money and deposit it into a new HSA within 60 days, though this is riskier because you are responsible for getting the money to the new account on time.

You can continue to use the HSA to pay for may have access to medical expenses even after you retire or turn 65. After age 65, the rules change: you can withdraw money for any reason without the 20% penalty, though non-medical withdrawals are taxed as income. At that point, an HSA functions somewhat like a traditional IRA, except that withdrawals for medical expenses remain tax-free.

If you enroll in Medicare, you can no longer contribute to an HSA, but you can still withdraw money from an existing HSA for may have access to medical expenses. You can use HSA funds to pay Medicare premiums, copays, and deductibles.

Frequently Asked Questions

Can I have an HSA if I am married and my spouse has a regular health plan?

No. If your spouse has any health coverage other than an HDHP (with limited exceptions for dental and vision), you cannot open an HSA, even if you are enrolled in an HDHP yourself. You would both need to be on an HDHP, or your spouse would need to have no coverage at all. Family HSA coverage requires that all family members on the plan be covered by the same HDHP.

What happens if I use my HSA for a non-medical expense by mistake?

If you withdraw money for a non-medical reason before age 65, you owe income tax on the amount plus a 20% penalty. If it was a genuine mistake, you may be able to correct it by redepositing the money into the HSA within 60 days, though this is not may provide to avoid taxes. Keep receipts for all withdrawals so you can prove which expenses were medical if the IRS ever questions your account.

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

Yes. You can withdraw money tax-free to pay for may have access to medical expenses of your spouse and any dependent you claim on your tax return, even if they are not on your health plan. You do not have to be the person receiving the medical care to use HSA funds for it.

What if I change from an HDHP to a regular health plan mid-year?

You can no longer contribute to your HSA once you are no longer enrolled in an HDHP. However, you can still withdraw money from the account for may have access to medical expenses. If you had already contributed for the full year before switching plans, you may owe taxes and penalties on contributions made after you left the HDHP, so consult a tax professional about your specific situation.

Can I invest the money in my HSA?

Many HSA providers offer investment options, but not all do. Some accounts function as straightforward savings accounts with a low interest rate. If your provider offers investments, you can typically choose from mutual funds, stocks, or bonds. Investment gains are tax-free as long as the money stays in the HSA. Check with your HSA provider about what investment options are available and any fees associated with them.