How an HSA account actually works

An HSA is a bank account tied to a high-deductible health plan where you put pre-tax money in, spend it on medical costs, and keep what you don't use. The money belongs to you — not your employer, not the insurance company. You can withdraw it whenever you need it for a may have access to medical expense, and if you don't spend it in a given year, it rolls over to the next year. Unlike a flexible spending account (FSA), there is no "use it or lose it" rule.

The account has three moving parts: contributions (money going in), may have access to expenses (what you can spend it on), and the account balance itself (which grows if you don't touch it). Understanding how each part works will tell you whether an HSA makes sense for your situation and how to use it without mistakes.

Key Takeaways

  • You contribute pre-tax money to an HSA through payroll deduction or direct deposit, and that money is not taxed as income.
  • You can spend HSA money on may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, and some medical equipment — without paying income tax on the withdrawal.
  • Money you don't spend stays in the account and earns interest or investment returns, and you can carry it forward indefinitely.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • You must be enrolled in a high-deductible health plan (HDHP) to contribute to an HSA, and you lose may be able to access the moment you switch to a different type of insurance.

Who can open an HSA and when

You can open an HSA only if you are enrolled in a high-deductible health plan. The IRS sets the deductible threshold each year — for 2024, a high-deductible plan for individual coverage has a deductible of at least $1,600, and for family coverage at least $3,200. Your employer's plan documents will tell you whether it qualifies.

You cannot have an HSA if you are covered by any other health insurance (with narrow exceptions for accident, disability, dental, vision, and long-term care coverage). You also cannot have an HSA if you are claimed as a dependent on someone else's tax return, or if you are enrolled in Medicare. The moment any of these change — you switch to a standard PPO, you turn 65, you get added to a spouse's plan — your HSA may be able to access ends, though the money already in the account stays yours.

You can open an HSA through your employer if they offer one, or independently through a bank or financial institution if you have individual coverage. The deadline to open one for a given tax year is typically April 15 of the following year, but employer plans may have their own enrollment windows.

How money gets into your HSA

Money enters an HSA through three routes: payroll deduction, direct deposit, or rollovers from another HSA. Payroll deduction is the most common — your employer deducts a set amount from each paycheck before taxes are calculated, and that money goes straight into your HSA. Because it is deducted before income tax, Social Security tax, and Medicare tax are applied, you save money on all three.

If you have individual coverage or your employer does not offer an HSA, you can deposit money directly into an HSA you open yourself. You can do this by check, bank transfer, or electronic deposit. These contributions are still tax-deductible when you file your tax return, even though they were not taken from your paycheck.

The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits change yearly, and your HSA provider will tell you what the current year's limit is.

What you can and cannot spend HSA money on

HSA money can pay for any medical expense that would be deductible on your tax return. This includes doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and some medical equipment like blood pressure monitors or glucose meters. You can also use it for mental health treatment, physical therapy, and certain over-the-counter medications (though not all — only those approved by the FDA as drugs, not supplements).

You cannot use HSA money for health insurance premiums, except for COBRA continuation coverage, long-term care insurance, or Medicare premiums after you turn 65. You also cannot use it for cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor), or most over-the-counter items like pain relievers or cold medicine.

When you withdraw money, keep your receipts. You do not have to submit them to the HSA provider at the time of withdrawal, but the IRS can ask for proof that the expense was may have access to. If you withdraw money for a non-may have access to expense before age 65, you pay income tax on the withdrawal plus a 20 percent penalty.

How the account balance works and grows

Any money you contribute but do not spend stays in the account. Unlike an FSA, there is no deadline to use it — it rolls over automatically every year. This means an HSA can function as a long-term savings account for medical expenses.

Most HSAs allow you to invest the balance in mutual funds, stocks, or bonds, similar to a 401(k). If you do, the money can earn returns. Some HSAs keep balances in a cash account earning interest instead. The investment options and interest rates vary by provider, so compare them before you open an account if you plan to invest a large balance.

The account is portable — it stays with you if you change jobs or retire. Your new employer cannot take the money, and you can keep contributing to it as long as you remain enrolled in an HDHP. If you leave your employer's HSA plan, you can roll the balance into an HSA you open independently.

What happens when you leave your job or change insurance

Your HSA balance is yours to keep, but your ability to contribute new money stops the moment your HDHP coverage ends. If you switch to a standard health plan through a new employer, you can no longer add money to the HSA. The balance stays in the account and you can still withdraw it for may have access to medical expenses, but you cannot make new contributions.

If you leave your job, you have the option to roll your HSA balance into an HSA you open independently, or to leave it with your employer's HSA provider if they allow it. Some employers require you to move the money within a set timeframe. Check your plan documents or contact your HSA provider to learn the deadline.

If you become may be able to access for an HDHP again later — through a new job or by switching to individual coverage — you can resume contributions to the same HSA or open a new one. There is no limit to how many times you can do this.

HSA withdrawals and tax implications

When you withdraw money for a may have access to medical expense, there is no tax or penalty — the withdrawal is tax-free. You do not need to report it on your tax return unless the HSA provider sends you a Form 1099-SA, which happens if the account earns investment income or if the provider suspects a non-may have access to withdrawal.

If you withdraw money for a non-may have access to expense before age 65, you owe income tax on the amount withdrawn plus a 20 percent penalty. For example, if you withdraw $500 for a non-may have access to expense and you are in the 22 percent tax bracket, you owe $110 in income tax plus $100 in penalty, for a total of $210. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as ordinary income.

Keep records of what you spend HSA money on. The IRS does not require you to submit receipts when you withdraw, but you must be able to prove the expense was may have access to if audited. Many people photograph receipts or keep a spreadsheet of medical expenses and dates.

Frequently Asked Questions

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

Yes, as long as your spouse is your dependent for tax purposes. You can also use HSA money to pay for any dependent's medical expenses, including children and parents you claim on your tax return. The expense must still be may have access to — the dependent's insurance status does not matter.

What happens to my HSA if I don't use the money?

It stays in the account indefinitely. Unlike an FSA, there is no deadline to spend it. The money can sit there for years, earning interest or investment returns if you choose to invest it. You can use it whenever you need it, even decades later.

Can I withdraw HSA money for something that is not medical?

Before age 65, you can withdraw it, but you will owe income tax plus a 20 percent penalty on the non-may have access to amount. After age 65, you can withdraw for any reason without penalty, though non-medical withdrawals are taxed as income. Many people use this feature to treat an HSA as a retirement savings account.

What if my employer closes the HSA plan?

Your balance is yours to keep. Your employer must give you the option to roll it into an HSA you open independently, or to transfer it to another HSA provider. You have a set timeframe to do this — usually 30 to 60 days — so act quickly if your employer notifies you of a plan closure.

Do I have to use my HSA debit card, or can I pay out of pocket and reimburse myself later?

Both work. Some HSAs issue debit cards that you can use at the pharmacy or doctor's office. Others require you to pay out of pocket and request a reimbursement. You can also reimburse yourself years later from the HSA balance — there is no time limit on reimbursements for past may have access to expenses, as long as you have receipts.