What is an HSA account?

In a nutshell

Health savings accounts (HSAs) are savings accounts used by those with high-deductible health plans to help pay for qualified medical expenses before a deductible is met.

• HSAs offer favorable tax benefits for those who participate.
• Not all who have high deductible health plans qualify for HSAs.
• HSAs roll over from year to year.

How HSA accounts work

To be eligible to open an HSA account, you must be enrolled in a high-deductible health plan (HDHP) through your employer or through a plan you’ve purchased yourself.

The IRS mandates the maximum contributions allowable to an HSA every year, and for 2024, those amounts are $4,150 for an individual and $8,300 for a family. If your employer contributes to your HSA in tandem with you, your combined contributions can’t exceed the maximum amounts.

Certain financial institutions also offer HSAs but only accept cash, unlike employer-sponsored HSAs, which allow account holders to take advantage of automatic payroll deductions. Whether through your workplace or a financial institution, your money is held tax-free until needed to pay for qualified medical expenses.

Who can contribute to an HSA?

If you have an HSA through your employer, there’s a good chance they are making contributions to your account. Unlike a typical 401(k), where employers match the contribution by employees up to a certain amount, HSA accounts are often funded without a matching requirement.

Learn more: What is a 401(k) and how does it work?

Contributions to an HSA savings account are not limited to the account owner. Any individual, like a friend or family member, may also contribute to qualified HSA accounts as long as the account owner meets all the qualifying conditions.

Withdrawals permitted

The purpose of an HSA is to help offset the costs associated with an HDHP, so using the account for any other purpose comes with penalties. If you withdraw money from your HSA and are under age 65 for purposes other than qualified medical expenses, you’ll have to pay income tax and an additional 20% tax penalty.

The IRS has a complete list of qualified medical expenses that can be paid using money from your HSA. These generally include deductibles, co-pays, dental services, vision care and prescription drugs.

HSA contribution rules

One of the great things about an HSA is that any leftover money in the account at year's end is rolled over and continues to grow. Unlike an FSA, which requires you to spend all the funds or risk forfeiting it by the end of the year (with some caveats), an HSA doesn’t have this requirement. So, if you didn’t need to access your account for medical expenses throughout the year, with an HSA, there’s no need to spend December making appointments and trying to spend all the money in the account.

How to open an HSA

The first requirement for opening an HSA is enrolling in an HDHP. Typically, the IRS redefines the requirements for an HDHP yearly, and for 2024, the deductible is $1,600 for an individual and $3,200 for a family. Not all HDHP qualify for HSA accounts, so you’ll want to choose a plan that specifically states it meets the requirements.

Once you’ve opened an HSA through your employer or a financial institution, if the option isn’t offered through your workplace, you’ll want to decide how much money to contribute throughout the year. For 2024, the most you can contribute to an HSA is $4,150 for an individual and $8,300 for a family.

HSA vs. flexible spending accounts (FSAs)

The two main differences between flexible spending accounts and HSAs are that FSA holders must be employed because the plans are employee-sponsored, and all the money in an FSA must be used by the end of the year.

While both types of accounts may be used for medical expenses, withdrawals from an FSA are not permitted for purposes other than qualified medical expenses. Additionally, contributions to an HSA are fixed and can incur tax penalties if changed or withdrawn for purposes other than medical expenses.

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HSAs aren’t for everyone, but they are a great way to save for unexpected medical expenses while watching your money grow tax-deferred. However, if you are close to retirement age and will soon be on Medicare or have health conditions that require frequent doctor visits and expensive drugs, having an HDHP might not be the best choice. Looking for other ways to save and invest your money might be a better option.

Learn more: How to invest money

Frequently asked questions (FAQs)

Can I pay my insurance premiums with my HSA funds?

Generally speaking, you can’t pay for your insurance premiums with HSA funds. However, if you lost your job and are receiving unemployment benefits, you can use some of your HSA funds to pay for COBRA and other health insurance coverage.

Do I have to use all my HSA money yearly?

Unlike flexible spending accounts (FSA), which require you to use all the money in the account by the end of the year or risk losing it, HSAs roll over each year and continue to grow and increase in value.

Who is eligible for an HSA?

According to the IRS, to be eligible for an HSA, you must meet the following requirements:

• Not be claimed as a dependent on another’s tax return.
• Not be on Medicare.
• Be enrolled in a qualified HDHP.
• Have no other health insurance through a spouse or other organization.

How can I determine how much a medical procedure will cost me?

The best way to determine the cost of a medical procedure is to call your care provider's business office. Many health care providers offer discounts to those who self-pay or pay an upfront deposit to guarantee payment after services are rendered.