What a Health Savings Account Is
A Health Savings Account (HSA) is a bank account you own that holds money set aside specifically for medical expenses. You contribute pre-tax dollars to it, the money grows tax-free, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike a flexible spending account (FSA), which you lose at the end of the year if you don't spend it, an HSA rolls over year to year and belongs to you permanently — even if you change jobs or health insurance.
To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). The IRS sets the minimum deductible each year; for 2024, that's $1,600 for individual coverage and $3,200 for family coverage. You cannot have other health coverage (like Medicare or a spouse's non-HDHP plan) and cannot claim yourself as a dependent on someone else's taxes.
The account itself is held at a bank, credit union, or financial institution — not through your employer, though your employer may offer one as a payroll option. You control the money, decide how much to contribute (within annual limits set by the IRS), and choose how to invest it if you want to.
Key Takeaways
- An HSA requires enrollment in a high-deductible health plan and lets you contribute pre-tax money that grows and withdraws tax-free for medical expenses.
- Unlike an FSA, HSA money rolls over every year and stays yours even if you leave your job or change insurance.
- You can use HSA funds for deductibles, copays, prescriptions, dental work, vision care, and many other medical costs — but not for insurance premiums or over-the-counter drugs without a prescription.
- After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.
- The IRS sets annual contribution limits; for 2024, individuals can contribute up to $4,150 and families up to $8,300.
How Much You Can Contribute Each Year
The IRS sets a maximum contribution limit that changes annually. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution).
You can contribute through payroll deduction (which reduces your taxable income automatically), or you can deposit money yourself and deduct it on your tax return. If your employer contributes on your behalf, that money counts toward your limit. You have until the tax filing deadline (usually April 15) of the following year to make contributions for the previous year.
What Medical Expenses You Can Pay With HSA Money
HSA funds cover a broad range of medical costs. You can use them for deductibles, copays, and coinsurance on your health plan. Prescription medications, dental work (cleanings, fillings, root canals, orthodontics), vision care (eye exams, glasses, contacts, LASIK), hearing aids, and mental health therapy all may have access to. You can also pay for medical equipment like crutches, wheelchairs, blood pressure monitors, and glucose meters.
Over-the-counter drugs like ibuprofen or cold medicine do not may have access to — unless you have a prescription from a doctor. Cosmetic procedures, gym memberships, and vitamins do not may have access to. Health insurance premiums generally do not may have access to either, with one exception: if you are receiving unemployment benefits, you can use HSA funds to pay for health insurance premiums during that time.
The IRS maintains a full list of may have access to medical expenses on its website. When in doubt, keep your receipt and the explanation of benefits from your insurance company. If you withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20% penalty (though the penalty drops to zero after age 65).
How HSA Money Grows and Stays With You
Money in an HSA earns interest or can be invested in mutual funds, depending on the account holder's choice and what the bank offers. Unlike an FSA, which operates on a "use it or lose it" principle, HSA money never expires. If you don't spend it this year, it sits in the account and grows. This makes an HSA a long-term savings tool as much as a short-term payment method.
The account is yours individually. If you leave your job, change health insurance, or retire, the HSA goes with you. You can roll it to a new bank or financial institution if you want. If you die, the account passes to your beneficiary (usually your spouse or estate). This permanence is what separates an HSA from an FSA, which is tied to your employer's plan and typically ends when you leave the job.
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 submit receipts to the bank; the IRS trusts you to keep records. However, if you are audited, you must be able to prove that the withdrawal matched a may have access to expense.
If you withdraw money for a non-may have access to expense before age 65, you owe income tax on the amount plus a 20% penalty. For example, if you withdraw $500 for something that doesn't may have access to and you are in the 22% tax bracket, you would owe $110 in income tax plus $100 in penalty, for a total of $210 in taxes on that $500.
After age 65, the rules change. You can withdraw HSA money for any reason without the 20% penalty. You still owe income tax on non-medical withdrawals, but the penalty disappears. This makes an HSA function like a traditional retirement account after 65.
HSA vs. FSA: The Main Differences
| Feature | HSA | FSA |
|---|---|---|
| Requires high-deductible plan | Yes | No |
| Money rolls over year to year | Yes | No (use it or lose it) |
| Account belongs to you if you leave job | Yes | No |
| Can invest the money | Yes (at most banks) | Usually no |
| 2024 contribution limit | $4,150 individual / $8,300 family | $3,300 individual / $6,650 family |
| Employer can contribute | Yes, counts toward limit | Yes, counts toward limit |
How to Open and Use an HSA
If your employer offers an HDHP, they usually offer an HSA option during open enrollment. You enroll in both the plan and the HSA at the same time. Your employer may offer a specific bank or financial institution, or they may let you choose your own. You can also open an HSA independently if you have an HDHP through the individual market or a spouse's plan.
Once open, you receive a debit card or checkbook to withdraw money, or you can request a check or bank transfer. Some HSAs allow you to pay medical providers directly from the account. Keep records of every withdrawal and the medical expense it paid for — the IRS does not require you to submit them, but you must have them if audited.
If you change jobs or health insurance, contact your HSA provider to find out what happens to the account. Most banks let you keep the HSA open even if you are no longer enrolled in an HDHP, though you cannot make new contributions unless you re-enroll in an HDHP.
Frequently Asked Questions
Can I use HSA money to pay my health insurance premium?
Generally no — health insurance premiums do not may have access to. The one exception is if you are receiving unemployment benefits; then you can use HSA funds to pay for health insurance premiums during that time. You cannot use HSA money to pay premiums for Medicare, Medicaid, or a spouse's plan.
What happens to my HSA if I lose my job?
The account stays yours. You own it individually, not through your employer. You can keep it open, continue to use the money for medical expenses, and withdraw it whenever you need to. You cannot make new contributions unless you enroll in another HDHP, but the money already in the account is yours permanently.
Can I use HSA money for my spouse's medical expenses?
Yes, if your spouse is covered under your family HDHP plan. You can also use HSA money for medical expenses of your children and dependents, even if they are not on your insurance plan. The key is that the person receiving the care must be your spouse, child, or dependent for tax purposes.
What if I withdraw money and later find out it wasn't a may have access to expense?
You owe income tax plus a 20% penalty on that amount. If you discover the mistake within a reasonable time, contact your HSA provider to see if they can help you correct it. Keep all receipts and documentation so you can prove what the money was used for if the IRS asks.
Can I have both an HSA and an FSA at the same time?
No. If you are enrolled in an HSA, you cannot have an FSA. However, you can have an HSA and a limited-purpose FSA (which only covers dental and vision expenses) at the same time. Check with your employer about what options are available.