How an HSA plan works: the basic structure

A Health Savings Account plan is a combination of two things: a high-deductible health insurance policy and a tax-advantaged savings account linked to it. You pay premiums for the insurance (like any other plan), but your deductible is higher—meaning you pay more out of pocket before insurance kicks in. In exchange, you can put pre-tax money into the HSA account and use it to pay medical bills without paying income tax on that money.

The account belongs to you, not your employer or insurance company. Money you don't spend stays in the account and rolls over year to year. You can invest it, let it sit, or withdraw it for non-medical expenses (though you'll owe income tax and a penalty if you do that before age 65). The insurance still covers you for major medical events—hospitalizations, surgeries, serious illness—once you meet the deductible.

Key Takeaways

  • An HSA plan pairs a high-deductible insurance policy with a savings account where you can deposit pre-tax money to pay medical costs.
  • You contribute to the HSA yourself, through payroll deduction if your employer offers it, or directly if you buy the plan on your own.
  • Money in the account rolls over year to year and can be invested, making it different from a use-it-or-lose-it flexible spending account.
  • You must have an HSA-may have access to high-deductible health plan to open or contribute to an HSA; you cannot have other health coverage at the same time.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.

Who can open an HSA and what the requirements are

To open an HSA, you must be enrolled in an HSA-may have access to high-deductible health plan. That plan must meet specific deductible and out-of-pocket limits set by the IRS each year. For 2024, the minimum deductible is $1,600 for individual coverage and $3,200 for family coverage. The maximum out-of-pocket limit (the most you pay before insurance covers everything) is $4,150 for individual and $8,300 for family.

You cannot have any other health coverage—no spouse's plan, no parent's plan, no Medicaid, no Medicare, no military coverage—while you hold an HSA. You also cannot be claimed as a dependent on someone else's tax return. If you meet these conditions, you can open an HSA through your employer's plan, through a bank or insurance company, or through a financial services provider that administers HSAs.

How much you can contribute and when

The IRS sets annual contribution limits. 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). These limits change each year based on inflation.

You can contribute money at any time during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year). If your employer offers payroll deduction, the money comes out pre-tax, which is the most common route. If you contribute on your own, you deduct it on your tax return. Either way, you avoid income tax on the contribution itself.

What you can pay for with HSA money

HSA funds can pay for may have access to medical expenses—a long list defined by the IRS that includes doctor visits, prescriptions, dental work, vision care, mental health treatment, physical therapy, and medical equipment like wheelchairs or hearing aids. You can also use HSA money to pay your insurance deductible, copays, and coinsurance. Preventive care covered by insurance at no cost to you (like annual checkups or vaccines) does not count as a may have access to expense.

You cannot use HSA money for health insurance premiums, with three exceptions: COBRA continuation coverage, Medicare premiums (after age 65), and long-term care insurance premiums. You also cannot use it for cosmetic procedures, over-the-counter medications (with some exceptions for specific drugs), or gym memberships.

When you pay a may have access to expense with HSA money, you can withdraw it directly from the account, or you can pay out of pocket and reimburse yourself from the HSA later—even years later. You do not need to submit receipts to the HSA provider unless you are audited, but you should keep them for your records.

How the account grows and what happens to unused money

Unlike a flexible spending account (FSA), which you lose money in if you do not spend it by the end of the year, an HSA rolls over completely. Every dollar you do not spend stays in the account. Many HSA providers let you invest the balance in mutual funds or other securities, similar to a retirement account. If your investments gain value, that growth is tax-free as long as you use the money for may have access to medical expenses.

This makes an HSA a long-term savings tool. Some people use it as a retirement account specifically for medical expenses, contributing the maximum each year and investing the balance rather than spending it. After age 65, you can withdraw HSA money for any reason without penalty—you just pay income tax on non-medical withdrawals, the same as a traditional IRA.

What happens when you change jobs or leave your employer's plan

Your HSA is yours to keep. If you leave your job, the account does not close and the money does not disappear. You can continue to use it to pay medical expenses, and you can continue to contribute to it if you stay enrolled in an HSA-may have access to plan (either through a new employer or one you buy on your own). If you lose HSA-may have access to coverage, you can no longer contribute, but you can still withdraw money for may have access to medical expenses.

If you switch to a non-HSA plan—such as a traditional PPO or HMO—you become ineligible to contribute. The money already in the account remains yours and can still be used for may have access to expenses, but you cannot add new contributions until you return to an HSA-may have access to plan.

How HSA plans compare to other health insurance options

An HSA plan has a higher deductible than most traditional plans, which means you pay more out of pocket for routine care. However, the tax savings from the HSA contribution and the ability to invest unused money can offset that cost over time. If you are generally healthy and do not expect many medical expenses, an HSA plan often costs less in total premiums plus out-of-pocket spending.

A flexible spending account (FSA) also lets you set aside pre-tax money for medical expenses, but FSA money does not roll over—you lose what you do not spend each year. An HSA has no such restriction. A Health Reimbursement Arrangement (HRA) is funded by your employer, not by you, and also does not roll over in the same way. For someone who wants long-term control over medical savings, an HSA is the most flexible option.

Frequently Asked Questions

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

Yes, if your spouse is not covered by their own health insurance plan. If your spouse has separate coverage, you cannot use your HSA to pay their expenses. If your spouse is on your family HSA plan, you can use the account for either person's may have access to medical expenses.

What happens to my HSA if I turn 65 and enroll in Medicare?

You can no longer contribute to the HSA once you enroll in Medicare, because Medicare is not an HSA-may have access to plan. Money already in the account stays yours and can be used for may have access to medical expenses, including Medicare premiums, deductibles, and copays. After 65, you can also withdraw money for any reason without the 20% penalty, though non-medical withdrawals are taxed as income.

Can I withdraw HSA money for non-medical reasons before age 65?

Yes, but you will owe income tax on the withdrawal plus a 20% penalty. For example, if you withdraw $1,000 for a non-medical reason at age 40, you pay income tax on that $1,000 plus $200 in penalty. After age 65, the penalty goes away—you only owe income tax.

Do I have to use my HSA money within a certain time frame?

No. You can let money sit in the account indefinitely and use it years later for medical expenses. There is no deadline to spend it, and there is no penalty for not spending it. This is what makes an HSA different from an FSA.

What if I have both an HSA and a spouse's FSA?

You cannot have an HSA if you or your spouse are covered by an FSA, even if the FSA is through your spouse's employer. The IRS treats this as having other health coverage that is incompatible with an HSA. You would need to drop the FSA coverage to open or contribute to an HSA.