Health Savings Account Insurance Is Not a Separate Product

A health savings account (HSA) is not insurance itself. It is a tax-advantaged savings account that holds money you set aside for medical expenses. The insurance part comes from the high-deductible health plan (HDHP) you must be enrolled in to open and contribute to an HSA. You own the HSA account; your employer or the plan administrator manages the HDHP that covers your medical care.

The confusion arises because the two are linked by law. You cannot have an HSA without an HDHP, and the HDHP is what actually pays for doctor visits, hospital stays, and prescriptions after you meet your deductible. The HSA is the bucket of pre-tax money you use to pay your share of those costs.

Think of it this way: the HDHP is your insurance coverage. The HSA is your personal savings account that lets you pay what the insurance does not cover using money the government does not tax.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan; the HDHP is the actual insurance, and the HSA is the savings account you use to pay medical costs.
  • Your HDHP covers preventive care at no cost to you, but you pay all other medical expenses until you reach your deductible, which is typically $1,500 to $7,050 for individuals in 2024.
  • Money in your HSA can pay for deductibles, copays, coinsurance, and many other medical expenses that your HDHP does not cover.
  • HSA funds roll over year to year and earn no interest, so you build a reserve over time that you can use for future medical costs or retirement.
  • If you lose HSA-may be able to access coverage or enroll in Medicare, you can no longer contribute to your HSA, though you can still withdraw funds for medical expenses.

How the High-Deductible Health Plan Works

The HDHP is a type of health insurance with lower monthly premiums but higher out-of-pocket costs before coverage kicks in. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,500 for individual coverage or $3,000 for family coverage. The maximum out-of-pocket limit (the most you pay before insurance covers everything at 100 percent) is $7,050 for individual coverage or $14,100 for family coverage. These numbers change each year.

Until you reach your deductible, you pay the full cost of most medical services. Once you hit the deductible, your HDHP begins to share costs with you through copays or coinsurance (a percentage of the bill). After you reach your out-of-pocket maximum, the plan covers 100 percent of may be able to access services for the rest of the year.

One important exception: preventive care is covered at no cost even before you meet your deductible. This includes annual physicals, certain screenings, vaccinations, and contraception. Your HDHP must cover these services with zero copay or coinsurance.

What Your HSA Pays For

Your HSA can pay for any medical expense that the IRS considers tax-deductible. This is a broad category that includes deductibles, copays, and coinsurance from your HDHP, but also many services your plan does not cover at all. You can use HSA funds to pay for dental work, vision care, hearing aids, mental health counseling, physical therapy, and prescription medications—even if your HDHP does not cover them.

You can also use your HSA to pay for over-the-counter medications (with a prescription from your doctor), medical equipment like crutches or blood pressure monitors, and long-term care insurance premiums. The IRS publishes a detailed list of may be able to access expenses on its website; if you are unsure whether a specific cost qualifies, you can check there or ask your HSA plan administrator.

What your HSA cannot pay for: cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and most over-the-counter items without a prescription. If you use HSA funds for an ineligible expense, you owe income tax on that withdrawal plus a 20 percent penalty.

How Much You Can Contribute and When

For 2024, you can contribute up to $4,150 per year to an individual HSA or $8,300 to a family HSA. These limits are set by the IRS and change annually. If you are 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). Your employer may also contribute to your HSA, and those contributions count toward your annual limit.

You can contribute to your HSA only during the months you are enrolled in an HDHP. If you drop your HDHP coverage in June, you can only contribute for the six months you were covered (unless you use the IRS's "testing period" rule, which allows a full-year contribution if you are covered on the first day of the month). Once you enroll in Medicare or lose HSA-may be able to access coverage, you cannot make new contributions, though you can still withdraw funds for medical expenses.

Contributions are made with pre-tax dollars, either through payroll deduction (if your employer offers it) or by depositing money yourself and deducting it on your tax return. Money you contribute is not taxed, money that grows in the account is not taxed, and withdrawals for may be able to access medical expenses are not taxed.

How Your HSA Differs From a Flexible Spending Account

An HSA is often confused with a flexible spending account (FSA), but they work differently. An FSA is also a pre-tax account for medical expenses, but it has a "use-it-or-lose-it" rule: money you do not spend by the end of the year (or during a grace period) is forfeited. An HSA has no such deadline. Money rolls over year to year, and you can let it accumulate for future medical costs or retirement.

An FSA does not require an HDHP; you can have an FSA with any health plan. An HSA requires an HDHP by law. An FSA is typically offered through an employer; an HSA can be opened through an employer or on your own if you have self-only HDHP coverage. If you have an FSA, you generally cannot also have an HSA in the same year, though some employers offer a limited FSA alongside an HSA.

For most people, an HSA is more valuable because the money does not disappear at year-end and you can invest it to grow over time. An FSA is useful if you have predictable medical expenses each year and want to use pre-tax money without worrying about investing.

What Happens to Your HSA When You Change Jobs or Retire

Your HSA belongs to you, not your employer. If you leave your job, your HSA stays with you. You can keep the account open, continue to withdraw funds for medical expenses, and even continue to contribute if you enroll in an HDHP through the individual market or a new employer. The money does not disappear, and there is no deadline to use it.

When you turn 65 and enroll in Medicare, you can no longer make new contributions to your HSA. However, you can still withdraw funds for medical expenses, including Medicare premiums, copays, and deductibles. After age 65, if you withdraw HSA funds for a non-medical expense, you owe income tax on the withdrawal but not the 20 percent penalty (the penalty applies only before age 65).

If you never use all your HSA funds during your lifetime, the remaining balance can be passed to your beneficiary. If your beneficiary is your spouse, they can treat the HSA as their own. If your beneficiary is anyone else, they owe income tax on the full balance, but the funds are theirs to keep.

When You Lose HSA may be able to access

You lose the right to contribute to your HSA the moment you enroll in any health plan other than an HDHP. This includes Medicare, Medicaid, a traditional PPO or HMO, or a spouse's plan. You also lose may be able to access if you enroll in TRICARE (military health coverage) or the Veterans Health Administration.

Once you lose may be able to access, you cannot make new contributions, but you can still withdraw funds for medical expenses without penalty. If you withdraw for a non-medical reason after losing may be able to access, you owe income tax plus a 20 percent penalty on the withdrawal amount.

If you drop your HDHP and enroll in a different plan temporarily (for example, during a job transition), you may be able to re-enroll in an HDHP later and resume contributions. However, if you enroll in Medicare, you cannot go back to an HDHP, so your contribution window closes permanently.

Frequently Asked Questions

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

You cannot use your HSA to pay premiums for your current HDHP or most other health insurance. However, you can use HSA funds to pay premiums for COBRA continuation coverage, long-term care insurance, and health insurance you purchase while unemployed. After age 65, you can use your HSA to pay Medicare premiums, including Part B, Part D, and Medigap policies.

What if I do not spend all my HSA money in a year?

Unlike a flexible spending account, HSA funds roll over to the next year with no limit. You can accumulate money indefinitely and use it whenever you need it. Some people treat their HSA as a retirement savings account and invest the funds to grow over time, then withdraw for medical expenses in later years.

Can I invest my HSA funds?

Yes. Most HSA administrators allow you to invest your balance in mutual funds, stocks, or other securities, similar to a 401(k). You can keep some funds in a cash account for immediate medical expenses and invest the rest for long-term growth. Investment earnings are not taxed as long as you withdraw for may be able to access medical expenses.

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

You owe income tax on the withdrawal amount plus a 20 percent penalty (before age 65). For example, if you withdraw $500 for a non-medical 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. Keep receipts for all HSA withdrawals in case the IRS asks for proof that expenses were medical.

Can I have an HSA if I am self-employed?

Yes, as long as you enroll in an HDHP through the individual market (not through an employer). You can open an HSA and contribute up to the annual limit. Self-employed people can deduct HSA contributions on their tax return, and the funds work the same way as for employees.