Free Guide to Health Savings Account Basics

What Is a Health Savings Account and How Does It Work?

A Health Savings Account, commonly called an HSA, is a savings account that lets you set aside money specifically for medical expenses. Unlike a regular savings account, money you put into an HSA receives special tax treatment from the federal government. This means the money you contribute is not subject to federal income tax, and when you withdraw it to pay for qualified medical costs, that withdrawal is also tax-free. The account itself can earn interest or investment returns, which grow tax-free as well.

Learn About Bone Health Supplement Options →

To understand how an HSA functions in practice, consider this example: Sarah earns $50,000 per year and contributes $2,000 to her HSA. That $2,000 is deducted from her taxable income, potentially lowering her tax bill. When Sarah visits her doctor and pays a $150 copay, she can withdraw $150 from her HSA without paying taxes on it. Any money remaining in her account at the end of the year rolls over to the next year—there is no "use it or lose it" requirement like some other health accounts.

The HSA operates differently from a Flexible Spending Account (FSA), which is another workplace health benefit. An FSA typically requires you to use the money within the calendar year or you forfeit it. An HSA, by contrast, allows your money to accumulate over time. This means you could potentially build a substantial health fund over many years of contributions.

HSAs are owned by individuals, not employers. Even if your employer helps you set up an HSA through your workplace, you own the account. If you change jobs, the account remains yours. You can take it with you and continue making contributions through future employers or on your own if you become self-employed.

Practical Takeaway: An HSA is a personal savings account with tax advantages designed to help you pay for medical expenses. Money you contribute reduces your taxable income, and withdrawals for qualified medical costs are not taxed. Unlike some other health benefits, unused HSA funds carry forward year to year.

Understanding HSA Eligibility Requirements

Not everyone can open an HSA. The account is connected to a specific type of health insurance plan called a High Deductible Health Plan, or HDHP. To use an HSA, you must be enrolled in an HDHP and meet certain other requirements set by federal tax law.

Learn About Healthy Beverage Options Today →

The first requirement involves your health insurance coverage. You cannot have other health insurance that is not a High Deductible Health Plan. For example, if you are covered by Medicare or a non-HDHP plan from your spouse's employer, you typically cannot contribute to an HSA. Limited exceptions exist for specific types of coverage, such as dental-only or vision-only plans, but the general rule is that your primary health insurance must be an HDHP.

A High Deductible Health Plan has a higher deductible than traditional insurance plans. For 2024, the IRS defines an HDHP as a plan with a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. The plan must also have an out-of-pocket maximum (the most you pay per year before insurance covers 100 percent of costs) of no more than $4,050 for individual coverage or $8,100 for family coverage. These numbers change each year based on inflation.

You also cannot be claimed as a dependent on someone else's tax return if you want to open your own HSA. Additionally, you must be a U.S. citizen or resident alien with a valid Social Security number. You cannot have an HSA if you are enrolled in TRICARE (military health insurance) or the Veterans Health Administration.

The enrollment period matters as well. You can open an HSA during the same month you enroll in an HDHP or within two months after enrollment. If your employer offers an HDHP, you typically set up an HSA during your company's open enrollment period or when you first become a new employee.

Practical Takeaway: To open an HSA, you must be enrolled in a High Deductible Health Plan and cannot have other non-HDHP coverage. You must also be a U.S. citizen or resident alien. Check with your health plan to confirm whether it qualifies as an HDHP.

Contribution Limits and How Much You Can Save

The federal government sets annual limits on how much money you can contribute to an HSA each year. These limits exist to maintain the tax-advantaged nature of the account. The contribution limits for 2024 are $4,150 for individual coverage and $8,300 for family coverage. These limits increase annually to account for inflation, so the numbers will be different in future years. When 2025 arrives, check the IRS website for updated limits.

Free Guide to Understanding Vaginal Health Products →

If you are age 55 or older, you can contribute an additional $1,000 per year. This "catch-up" contribution allows older individuals to build larger balances as they approach retirement and may face more medical expenses. For example, a 58-year-old with individual coverage could contribute $4,150 plus $1,000, totaling $5,150 for the year.

The way you contribute matters for determining how much you can add. If you enroll in an HDHP partway through the year, your contribution limit is reduced proportionally. For instance, if you enroll in an HDHP in July, you can only contribute for the remaining six months of the year. However, one exception exists called the "last month rule." If you enroll in an HDHP during December, you can contribute the full annual amount for that year, as long as you maintain HDHP coverage through December 31 of the following year.

Contributions can come from multiple sources. You might contribute money from your paycheck through a payroll deduction at work. You can also make contributions directly to your HSA outside of work. Your employer may also contribute money to your HSA as part of your benefits package. All contributions count toward your annual limit, regardless of their source.

One significant advantage of HSAs is that unused funds roll over indefinitely. Unlike FSAs, which typically reset to zero each year, an HSA balance remains yours year after year. This means you could contribute $4,150 annually for 20 years and accumulate roughly $83,000 (before accounting for any interest or investment growth). This long-term accumulation potential makes HSAs valuable for building a health-related safety net.

Practical Takeaway: The 2024 contribution limit is $4,150 for individual coverage or $8,300 for family coverage. People age 55 and older can contribute an extra $1,000. Unused funds carry forward year to year, allowing your balance to grow over time.

Qualified Medical Expenses You Can Pay With HSA Funds

HSA money can only be used to pay for "qualified medical expenses" as defined by the IRS. Understanding which expenses qualify is important because using HSA funds for non-qualified expenses triggers taxes and penalties. The IRS maintains a detailed list of qualified expenses, and the rules can be specific and sometimes surprising.

Learn About COVID Symptom Timelines After Exposure →

Clearly qualified expenses include deductibles, copayments, and coinsurance for your HDHP. If your insurance plan requires you to pay $50 when you visit a doctor, that copay is a qualified expense. The same applies to the portion of costs you pay before reaching your deductible. Prescriptions, including over-the-counter medications like pain relievers and cold medicine (purchased after 2020), are qualified expenses. Dental work including cleanings, fillings, root canals, and orthodontia also qualifies. Vision care, including eye exams, glasses, and contact lenses, counts as a qualified expense.

Mental health treatment, including therapy sessions and psychiatric care, is a qualified expense. Physical therapy and chiropractic care also count. Hearing aids and related equipment are covered. Medical equipment such as crutches, wheelchairs, and blood pressure monitors are qualified expenses. Even certain medical supplies like bandages, elastic wraps, and test strips for glucose monitoring count.

Some expenses surprise people because they do not count as qualified. General health and wellness products, such as vitamins, supplements, and fitness equipment, are not covered unless prescribed by a doctor for a specific condition. Cosmetic procedures, including teeth whitening or Botox, are not qualified expenses.