A health savings account plan is a high-deductible health insurance paired with a tax-advantaged savings account

An HSA plan has two parts working together. First, you buy a high-deductible health insurance plan — one where you pay more out of pocket before insurance kicks in, but your monthly premiums are lower. Second, you open a health savings account, a special savings account where you can set aside pre-tax money to pay for medical expenses. The money you put in reduces your taxable income, grows tax-free, and comes out tax-free when you use it for may have access to medical costs.

The trade-off is straightforward: you accept higher out-of-pocket costs when you need care, but you get lower premiums and a tax break on money you save for medical expenses. This structure works best if you are generally healthy, do not expect major medical bills this year, and want to reduce your overall healthcare spending.

You cannot open an HSA unless you are enrolled in a high-deductible plan. If you switch to a regular health plan or Medicare, your HSA stays open and you can keep the money in it, but you cannot add new contributions.

Key Takeaways

  • An HSA plan requires enrollment in a high-deductible health insurance plan, which has lower premiums but higher deductibles than standard plans.
  • Money you contribute to an HSA reduces your taxable income for the year, and withdrawals for medical expenses are not taxed.
  • You must use HSA funds for may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, and some medical equipment — or pay income tax plus a 20 percent penalty on non-medical withdrawals.
  • HSA funds roll over year to year and belong to you; if you change jobs or retire, the account goes with you.
  • The IRS sets annual contribution limits, which vary by whether you have individual or family coverage.

How the deductible and out-of-pocket maximum work

The deductible is the amount you must pay for medical care before your insurance starts to pay. With a high-deductible plan, this is typically $1,500 to $3,000 for individual coverage or $3,000 to $6,000 for family coverage, though these ranges vary by plan and year. Until you reach your deductible, you pay the full cost of most care — doctor visits, lab work, imaging, prescriptions.

Once you hit your deductible, your insurance begins to share costs with you through copays or coinsurance. You continue paying until you reach your out-of-pocket maximum, the total amount you will pay in a year for covered care. After that, your insurance covers 100 percent of covered medical costs for the rest of the year. Out-of-pocket maximums are typically $3,500 to $7,000 for individual coverage or $7,000 to $14,000 for family coverage.

This is where the HSA becomes useful: you can use the money in your account to pay your deductible and out-of-pocket costs, which reduces the real cost of care and lowers your taxable income at the same time.

What you can and cannot pay for with HSA money

HSA funds cover a wide range of medical expenses. may have access to expenses include doctor and dentist visits, prescription medications, mental health counseling, physical therapy, hearing aids, glasses and contact lenses, insulin, and many over-the-counter items like pain relievers and allergy medicine. You can also use HSA money to pay your health insurance premiums if you are receiving unemployment benefits, and to pay Medicare premiums and long-term care insurance premiums after age 65.

Expenses that do not count include cosmetic surgery, gym memberships, vitamins (unless prescribed by a doctor), and most over-the-counter items that are not drugs or medical devices. If you withdraw money for a non-may have access to expense before age 65, you owe income tax on that withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, but you still owe income tax on non-medical withdrawals.

Keep receipts for all medical expenses you pay with HSA money. The IRS does not require you to submit them when you withdraw funds, but you must be able to prove the expense was may have access to if you are audited.

How much you can contribute and what happens to unused money

The IRS sets annual contribution limits for HSAs. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits change each year. You can contribute the full amount yourself, or your employer can contribute on your behalf, or you can split contributions between yourself and your employer — as long as the total does not exceed the limit.

Money you do not spend in a given year stays in your account and rolls over to the next year. There is no "use it or lose it" rule with HSAs, unlike flexible spending accounts. This means you can build up savings over time and use them for medical expenses in future years, or even in retirement.

If you contribute more than the annual limit, you owe income tax on the excess amount plus a 6 percent penalty for each year the overage remains in the account. Your HSA provider should track your contributions and alert you if you are approaching the limit.

How HSA accounts are held and what happens when you change jobs

Your HSA is your personal account, not your employer's. Even if your employer set up the account or contributed money to it, the funds belong to you. When you leave a job, the account goes with you — you do not forfeit the balance or lose access to the money.

You can move your HSA to a different bank or investment provider if you want better returns or lower fees. This is called a trustee-to-trustee transfer, and it does not count as a withdrawal or trigger taxes. You can also withdraw money yourself and deposit it into a new HSA within 60 days without penalty, though this is riskier because you are responsible for meeting the deadline.

If you are no longer enrolled in a high-deductible plan, you cannot make new contributions to your HSA, but you can keep the account open and continue to withdraw money for may have access to medical expenses. Many people keep their HSAs open into retirement specifically for this reason.

HSA plans compared to other ways to save on healthcare costs

A flexible spending account (FSA) is similar to an HSA in that you contribute pre-tax money for medical expenses, but FSAs have stricter rules. FSA money does not roll over — you lose what you do not spend in a year (though some plans offer a grace period or a small carryover). FSAs are tied to your employer and do not move with you when you change jobs. FSAs also have lower contribution limits, typically around $3,200 per year.

A regular health insurance plan (preferred provider organization or health maintenance organization) has lower deductibles and out-of-pocket maximums than a high-deductible plan, which means you pay less when you need care. However, your monthly premiums are higher, and you do not get the tax break that comes with an HSA. A regular plan makes sense if you expect significant medical expenses or prefer predictable costs.

An HSA plan is most cost-effective if you are healthy, do not expect major medical bills, and can afford to pay out of pocket until you hit your deductible. If you have chronic conditions or regular prescriptions, a regular plan with lower out-of-pocket costs may save you money overall despite higher premiums.

Investment options and fees within an HSA

Most HSA providers let you keep your balance in a cash account, similar to a savings account, earning minimal interest. Some providers also let you invest HSA funds in stocks, bonds, or mutual funds, which can grow faster over time but carry investment risk. If you invest and the market drops, your HSA balance drops with it.

HSA providers charge fees for account maintenance, investment management, or debit card use. These fees vary widely — some providers charge nothing, while others charge $2 to $5 per month or a percentage of your balance. Before you open an account, compare fee structures across providers. If you are building long-term savings, even small monthly fees add up.

If your employer offers an HSA through a specific provider, you may not have a choice of where to open the account. If you are self-employed or your employer does not offer an HSA, you can open one with any bank or investment firm that offers HSA accounts.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family health plan, you can use your HSA to pay for their may have access to medical expenses. If your spouse has their own high-deductible plan and their own HSA, they should use their own account first. HSA funds can also pay for medical expenses of your dependents, even if they are not on your insurance plan.

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

Your HSA account stays open and you can continue to withdraw money for may have access to medical expenses, including Medicare premiums, copays, and deductibles. You can no longer make new contributions once you are on Medicare. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still subject to income tax.

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

You can use HSA funds to pay Medicare premiums, COBRA premiums, and long-term care insurance premiums. You cannot use HSA money to pay the premiums for your high-deductible plan itself. If you are receiving unemployment benefits, you can use HSA money to pay any health insurance premium.

What if I withdraw money from my HSA for a non-medical expense?

Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you owe income tax but no penalty. For example, if you withdraw $1,000 for a non-medical expense at age 50 and you are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty, for a total of $420 in taxes on that $1,000.

Can I have both an HSA and a flexible spending account?

No. If you are enrolled in an FSA, you cannot open or contribute to an HSA in the same year. However, you can have an HSA and a limited-purpose FSA that only covers dental and vision expenses. Check with your employer about which combination is available to you.