What a health savings account plan does

A health savings account plan is a combination of two things: a high-deductible health insurance plan and a tax-advantaged savings account that you control. The insurance covers major medical events after you meet a deductible (the amount you pay out of pocket before insurance kicks in). The savings account lets you set aside pre-tax money to pay for that deductible and other medical costs. You own the account and the money in it—it does not disappear at the end of the year.

The core trade-off is straightforward: you accept a higher deductible on your insurance in exchange for the ability to save money tax-free and keep it indefinitely. If you stay healthy and do not use much medical care, you build savings. If you need significant care, your insurance covers most of the cost once you hit the deductible.

Key Takeaways

  • An HSA plan requires a high-deductible health insurance policy, meaning you pay more out of pocket before insurance coverage begins, but you get a tax-advantaged savings account to help cover those costs.
  • Money you contribute to an HSA is not subject to federal income tax or payroll tax, and it rolls over year to year—you never lose unused funds.
  • You can use HSA funds to pay for the insurance deductible, copays, coinsurance, and a wide range of medical expenses including dental, vision, and prescription drugs.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals before 65 are taxed as income plus a 20 percent penalty.

How the insurance and savings account work together

When you enroll in an HSA plan, you choose a high-deductible health insurance policy. For 2024, the IRS defines a high deductible as at least $1,600 for individual coverage or $3,200 for family coverage. Your actual deductible might be higher—$2,500, $5,000, or more—depending on the specific plan your employer or the marketplace offers.

At the same time, you open an HSA through a bank, credit union, or insurance company. You (or your employer) deposit money into this account. That money sits there until you need it. When you go to the doctor, you pay the bill out of pocket up to your deductible. Once you hit the deductible, your insurance starts paying its share. You can use HSA funds to cover the deductible, or you can pay it yourself and leave the HSA untouched to grow.

The savings account is separate from the insurance. Your insurance company does not control it. You decide how much to contribute each year (within IRS limits), how to invest it, and when to withdraw it for medical costs.

Tax advantages and contribution limits

Money you put into an HSA is not subject to federal income tax or payroll tax (Social Security and Medicare tax). If you contribute $3,000 to an HSA, you reduce your taxable income by $3,000. If your employer contributes on your behalf, that money is also tax-free to you.

For 2024, you can contribute up to $4,150 per year for individual coverage or $8,300 for 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 annually based on inflation. Your employer may contribute, you may contribute, or both—but the total cannot exceed the annual limit.

Any money you do not spend in a given year stays in your account and earns interest or investment returns. There is no "use it or lose it" rule. This is different from a flexible spending account (FSA), where unspent money typically reverts to your employer at year-end.

What you can pay for with HSA funds

HSA money can cover a broad range of medical expenses. The IRS publishes a list of may have access to medical expenses, which includes doctor visits, hospital stays, surgery, prescription drugs, insulin, and medical equipment like crutches or wheelchairs. Dental work, vision care, and hearing aids also count. Mental health treatment, physical therapy, and chiropractic care are covered. Over-the-counter medications like pain relievers and allergy medicine count only if you have a prescription.

You can pay for the insurance deductible, copays, and coinsurance with HSA funds. You can also use the money to pay for medical expenses your insurance does not cover at all, as long as they are on the IRS list. You cannot use HSA funds to pay insurance premiums (with narrow exceptions for COBRA, Medicare, or long-term care insurance).

Keep receipts and records. You do not have to submit them to the HSA provider, but the IRS can ask for proof that withdrawals were for may have access to expenses. If you withdraw money for a non-may have access to expense before age 65, you owe income tax on that amount plus a 20 percent penalty.

How to access and invest HSA money

Most HSAs come with a debit card that you can use at pharmacies, doctor offices, and hospitals. Some accounts also offer checks. You can withdraw money directly to pay a medical bill. Some people keep the HSA as a cash account; others invest the funds in mutual funds or other investments offered by the HSA provider, similar to a retirement account.

If you invest HSA funds, any earnings (interest or investment gains) are tax-free as long as you use the money for may have access to medical expenses. This makes an HSA a powerful long-term savings tool. You can let the money grow for decades and withdraw it for medical costs whenever you need it.

You can also reimburse yourself from the HSA for medical expenses you paid out of pocket in the past, even years ago, as long as you have documentation. Some people use this strategy to let their HSA grow untouched while paying current medical bills with other money, then reimburse themselves later.

What happens if you change jobs or leave your HSA plan

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to use it for medical expenses, and you can continue to invest it. You cannot make new contributions unless you stay enrolled in an HSA-may be able to access high-deductible plan, but the existing balance is yours to keep.

If you switch to a different health plan that is not HSA-may be able to access (such as a traditional PPO or HMO), you can no longer contribute to the HSA, but you can still withdraw money from it for may have access to medical expenses. The account does not close.

If you move to a different HSA provider, you can transfer the balance directly (called a trustee-to-trustee transfer) without tax consequences. You can also do a rollover once per year, where you withdraw the money and deposit it into a new HSA within 60 days.

HSA plans versus other health insurance options

An HSA plan makes the most sense if you are relatively healthy and do not expect major medical expenses in the near term. The high deductible means you pay more upfront for routine care, but the tax savings and the ability to build a medical savings fund can offset that cost over time.

If you have chronic conditions that require frequent doctor visits or expensive medications, a traditional health plan with a lower deductible and higher premiums might cost less overall, even though you do not get the tax advantage of an HSA.

Some employers offer both HSA-may be able to access plans and traditional plans. Compare the deductible, the premium you pay, and the out-of-pocket maximum (the most you will pay in a year before insurance covers everything). Run the numbers for your expected medical costs to see which plan saves you money.

Frequently Asked Questions

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

Yes, if you have family coverage. HSA funds can pay for medical expenses of you, your spouse, and any dependents you claim on your tax return, regardless of whether they are on your health insurance plan. You do not need to be on the same insurance to use the HSA for their costs.

What happens to my HSA when I turn 65?

At 65, you become may be able to access for Medicare. You can no longer contribute to an HSA once you enroll in Medicare, but you can still withdraw money for may have access to medical expenses. After 65, you can also withdraw HSA funds for any reason without the 20 percent penalty—you will owe income tax on non-medical withdrawals, but not the penalty. This makes an HSA function like a retirement account after 65.

Can I use HSA money for gym memberships or wellness programs?

Not usually. General fitness and wellness expenses do not count as may have access to medical expenses. However, if your doctor prescribes a specific fitness program as treatment for a medical condition (such as cardiac rehabilitation), that cost may be covered. Ask your HSA provider or check the IRS list of may have access to expenses for your specific situation.

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

Before age 65, you owe federal income tax on the amount withdrawn plus a 20 percent penalty. After 65, you owe income tax but no penalty. Keep records of what you spent HSA money on in case the IRS asks. If you can show the withdrawal was for a may have access to medical expense, you avoid the penalty and tax.

Can I open an HSA if my employer does not offer one?

Yes. You can open an HSA on your own through a bank or insurance company as long as you are enrolled in an HSA-may be able to access high-deductible health plan. You might find such a plan through the health insurance marketplace or through a professional association. You can contribute up to the annual limit regardless of whether your employer contributes.