What Is a Health Savings Account (HSA)?

Health savings accounts are savings accounts that let people save money tax-free for qualified medical expenses. They work like regular savings accounts but use pre-tax dollars.

Updated: November 22, 2024

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A health savings account (HSA) is a type of savings account that allows individuals to save money tax-free and use it to pay for qualified medical expenses. Understanding which medical costs can be paid with money saved in an HSA and which can't is essential to getting the most out of this savings account. For example, you can use your HSA balance for hospital bills, insulin treatment and vaccines but not for cosmetic surgery or weight loss programs.

Besides helping with medical costs, an HSA has tax-free contributions and growth. The same goes when withdrawing from your account for eligible expenses, giving you a three-pronged advantage for taxation. For 2023, you can contribute up to $3,850 if you have a self-only health care plan. Policyholders with family coverage can contribute as much as $7,750.

Not everyone with a health care plan can open an HSA — these accounts are only available to policyholders with high-deductible health plans (HDHP). Although these plans come with lower premiums, you'll have to pay more out-of-pocket before your health insurance carrier covers your medical expenses.

What is a Health Savings Account (HSA) Fast Facts.png

An HSA works similarly to a regular savings account but uses pre-tax dollars. You can use the funds to cover qualified medical expenses.

Not everyone is eligible for an HSA account. You must first have an HDHP to open one. You can’t open an HSA if you have Medicare or use a health plan that doesn't require you to pay a deductible or copayments before it starts sharing costs.

Policyholders under 65 may incur a 20% tax penalty and have to pay federal income tax on the amount if they use HSA funds for non-medical expenses. For those 65 and older, the penalty can be waived, but any withdrawal is subject to federal income tax.

You can use your HSA funds to pay for several qualified medical expenses. These include (but are not limited to) ambulance costs, doctor visits, prescription drugs and certain long-term care services, among many others.

Your maximum contribution varies depending on your health plan coverage. In 2023, you can contribute up to $3,850 if you have self-only coverage or $7,750 if you have family coverage. Those over 55 can contribute an additional $1,000 annually.

Unlike other health care savings options, you don't need to spend the money in your HSA account within a specific period. Whatever you have at the end of the year rolls over to the next. It also remains in your account if you switch jobs.

Sources:

Health Insurance Marketplace

Benefits of a Health Savings Account

To fully understand what an HSA is, you need a clear picture of the benefits it offers. MoneyGeek provides various reasons why having a health savings account can be an asset, such as tax advantages and convenience.

Tax Advantages

HSAs give account owners a triple-tax advantage. You use pre-tax dollars for your contributions, allowing you to deduct the amount from your taxable income. It also grows your money tax-free, and you don't pay tax on withdrawals for eligible medical expenses.

No Expiration Date on Funds

You shouldn't feel pressured to use your HSA contributions unless you need them to cover qualified medical expenses. HSA funds don't expire, so your money stays in your account until you use it.

Possible Use for Spouse and Dependents

Even if your high-deductible health plan has self-only coverage, you can still use your HSA funds to pay for your spouse or child's eligible medical expenses (as long as their expenses aren’t otherwise reimbursed).

Doesn't Go Away if You Change Jobs

Your HSA is yours alone, although some employers may contribute. However, whatever funds are in your account remain with you even if you leave your job, regardless of the reason.

Convenient Use

Some HSA providers issue debit cards, which you can use to pay for eligible medical expenses. Since the payment is withdrawn directly from your HSA account, you won't have to submit receipts to confirm or validate your purchase.

Eligibility Requirements

Not everyone with health insurance can have an HSA. The Internal Revenue Service has specific requirements that you must meet to contribute to an HSA account.

For example, among the different types of health insurance, only HDHPs allow you to open an HSA. You also generally cannot have other health coverage beyond the HDHP, except for insurance that covers things like workers’ compensation liability, specific illnesses or hospital stays.

On the other hand, the following items disqualify you from having a health savings account:

You have coverage from Medicare.
You are listed as a dependent on someone else's tax return.
Your spouse has an HDHP that covers you.

DO I NEED TO INFORM THE IRS OF MY HSA PLANS?

The short answer is no — you don't need the IRS' permission to get a health savings account. Instead, you can go to a bank or insurance agency — most are qualified HSA trustees that have already been assessed by the IRS.

How to Open and Manage an HSA

If you’re considering an HSA, you must understand how it works and how to manage it. MoneyGeek walks you through the end-to-end process — from ensuring your eligibility to making contributions.

1
Check Your Eligibility
Just because you have a health insurance plan doesn't automatically mean you can open an HSA account. Remember, you need to have an HDHP to be eligible. You must also not be enrolled in Medicare or a health plan that isn’t HSA-eligible. Finally, no one can claim you as a dependent on their tax return.
2
Shop for Qualified HSA Providers
There's no lack of HSA providers available. For example, you can speak with your insurance provider or bank. Some employers offer HSA accounts as part of their benefits package — if yours does, you can also see if they can help you open one.
3
Choose Your HSA Provider
Like health insurance companies, different HSA providers have varying offerings. For example, some providers charge fees for opening, closing and maintaining the account. Don't forget to research and compare your options before deciding on a provider.
4
Invest Your HSA Funds
If you don't think you'll need your HSA funds in the next couple of years, investing your money into the market is a good strategy for faster growth. Discuss your options with your provider and see what investment vehicles are available.
5
Make Contributions
Once you've opened your HSA, it's time to put money into the account. You can do this by making regular contributions. Your provider may have various options, such as online transfers, check deposits or payroll deductions (if your employer offers them).

Contribution Rules and Limits

As long as you're qualified, you can contribute to your HSA account. If you're employed and your organization offers an HSA, you and your employer may contribute during the year. In addition, any other person can make contributions on your behalf. However, the same limit applies — once you reach it, you must wait for the next year to begin before contributing.

Remember, all HSA contributions must be in cash. You cannot use stock or properties to fund your account.

Each year, the IRS determines the maximum amount you can contribute to your HSA. The amount varies depending on the type of coverage you have and your age.

HSA Contribution Limits 2023

	Self-Only Coverage	Family Coverage
HSA Contribution Limit per Year	$3,850	$7,750
HSA “Catch-up” Contribution (55 or Older) per Year	$1,000	N/A

Tax Advantages of HSAs

You may have noticed several mentions of HSAs having many tax advantages. Knowing these is an integral part of understanding how you can benefit from an HSA.

Here are the tax benefits you can enjoy if you have an HSA:

You can reduce your taxable income by deducting your HSA contributions. It applies to all funds contributed by anyone except your employer.
You don't have to itemize your contributions on Schedule A (Form 1040) to claim a tax deduction.
Whatever your HSA earns (from interest or investment gains) is tax-free.
Tax does not apply to withdrawals or distributions used for eligible medical expenses.

Eligible Medical Expenses

One of the advantages of opening an HSA is having a convenient tax-free savings vehicle to pay for various health care costs. However, knowing which medical expenses are eligible can help you avoid taxes and penalties.

Penalties for Non-Medical Costs

Although you can use your HSA funds for non-medical expenses, you must be ready to pay penalties. These come in the form of federal income tax on the amount spent and an additional tax penalty if you're under 65.

Withdrawal Penalties for Non-qualified Use

Withdrawal for Non-Qualified Use Before Age 65

Pay federal income tax on the amount withdrawn
Pay 20% tax penalty

Withdrawal for Non-Qualified Use After Age 65

Pay federal income tax on the amount withdrawn
No 20% tax penalty

Health Savings Account FAQ

Opening a health savings account with your high-deductible health plan may be an effective way to manage your medical expenses. However, you may have other questions before deciding whether it's the right move for you. MoneyGeek included the answers to some commonly asked questions.

Do health savings accounts earn interest?

Yes, an HSA account earns interest over time, similar to a regular savings account. Best of all, your HSA funds grow tax-free.

Where do I look for HSA providers?

The most convenient way to look for an HSA provider is to ask your health insurance carrier. They may offer HSA services, in which case you won't have to deal with a different organization. You can also check with your bank or insurance provider, as many of these institutions are already approved to provide HSAs by the IRS.

Why are HSA accounts triple-tax advantaged?

An HSA account's tax-free benefits come from three angles. First, you use pre-tax dollars for your contributions. Next, all financial growth is tax-free. Finally, you can enjoy tax-free withdrawals, assuming you use your HSA funds for qualified medical expenses.

How is an HSA connected to an HDHP?

A high-deductible health plan is a prerequisite for an HSA. You can't open a health savings account unless you enroll in this type of health insurance plan.

How much can I contribute to my HSA?

The IRS determines the maximum contribution for HSAs. For 2023, you can contribute up to $3,850 if you have self-only coverage. You can add a catch-up contribution of $1,000 if you're 55 or older. For those with family coverage, the maximum amount is $7,750.

Related Resources

A stronger understanding of health insurance can help you better grasp whether an HSA is a good choice for your needs. MoneyGeek included several resources regarding health coverage options.

Four Common Ways to Get Health Insurance: We always emphasize the value of having health coverage, but do you know how to get it? MoneyGeek discusses four methods of obtaining health insurance and helps you decide which one is best for you.
Guide to Health Insurance for Students and Young Adults: You’re never too young to get health insurance. Read about common myths young people have about coverage and what health insurance options are available for them.
Life vs. Health Insurance: What’s the Difference and Which One Should You Buy? Learn about the difference between these insurance plans and see which one you should get.
The Average Cost of Health Insurance in 2023: Read about health insurance costs and how they vary by age, family size, plan type and other factors.
How to Get the Most Out of Your Health Insurance Plan: Health insurance isn’t cheap, so it’s important to maximize the benefits of your coverage. MoneyGeek shares several strategies.

About Mark Fitzpatrick

Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.

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sources

Health Insurance Marketplace. "What’s a Health Savings Account?." Accessed November 5, 2024.
HealthCare.gov. "Health Savings Account (HSA)." Accessed November 5, 2024.
Internal Revenue Service. "Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed November 5, 2024.
South Carolina Retirement Systems and State Health Plan. "Eligible Medical Expenses." Accessed November 5, 2024.