From a broken arm or a persistent cough to a chronic condition such as arthritis or diabetes, many healthcare situations can arise that could stress your budget. A health savings account (HSA) offers a solution, blending the need to save for qualified medical expenses[1] now and in the future on a tax-advantaged[2] basis.

An HSA is more than a savings account – it’s a financial planning tool specifically designed for healthcare costs. By setting aside pre-tax money for current or future medical expenses, an HSA can help you effectively manage these costs and handle unexpected medical bills.

How exactly does an HSA work, and who qualifies for one? The following guide provides insight into the structure, usage, and benefits of HSAs. That way, you can decide whether this tool is a good fit for your healthcare and financial planning needs.

What Is A Health Savings Account?

A health savings account is a tax-advantaged account designed specifically for individuals with high-deductible health plans (HDHPs)[3]. The primary purpose of an HSA is to help you save funds to pay for a wide range of medical expenses that your health insurance may not fully cover.

The HSA benefits include tax-deductible contributions to the account, the money grows tax-free[4], and withdrawals are not taxed when used for qualifying medical expenses.

The funds you contribute to an HSA are yours to keep[5],  unused funds roll over from year to year. Additionally, you have the option to invest your HSA funds[6], the dollars invested can help you to build financial security for retirement savings or to pay for unexpected medical expenses. You may be able to access unused balances to supplement retirement income after age 65, subject to applicable income taxes. Your money stays with you even if you switch jobs, change medical coverage, become unemployed or retire.

What Expenses Can An HSA Cover?

HSAs can be used for a wide range of medical expenses and to pay costs incurred by you, your spouse, or an eligible dependent for tax purposes[8]. Eligible medical expenses include, but are not limited to:

  • Deductibles, copayments, and coinsurance
  • Prescription medications
  • Over the counter medications (no RX needed)
  • Vision care (e.g., eye exams, eyeglasses, contact lenses, corrective surgeries)
  • Dental treatments (e.g., cleanings, fillings, crowns, orthodontics)
  • Menstrual care products (e.g., tampons, sanitary pads)
  • Medical equipment and supplies (e.g., bandages, wheelchairs, blood sugar test kits)
  • Physical therapy (e.g., post-injury rehabilitation, chronic pain management)
  • Psychiatric care (e.g., counseling, therapy sessions)

Typically, HSAs cannot be used to pay for health insurance premiums. However, there are notable exceptions to this rule, including:

  • Medicare premiums (excluding Medicare supplement policies, such as Medigap) if you are age 65 or older
  • Long-term care insurance premiums
  • Healthcare continuation coverage (such as COBRA)
  • Health insurance premiums while you’re receiving federal or state unemployment compensation

HSA Eligibility Requirements

The Internal Revenue Service (IRS) sets the eligibility requirements for HSAs. To contribute to an HSA, the following key factors must apply.

1. Enrollment In An HDHP

You must be covered by a high-deductible health plan (HDHP). For the 2024 calendar year, to qualify as an HDHP, a plan must have a minimum annual deductible of $1,600 for self-only coverage or $3,200 for family coverage. The plan must also have an annual out-of-pocket maximum of $8,050 for self-coverage and $16,100 for family coverage. Eligible out-of-pocket expenses include deductibles, copayments, coinsurance, and other expenses but exclude health insurance policy premiums[7].

2. No Other Health Coverage

You must not have any other health coverage that isn’t an HDHP. This includes being covered by another person’s plan that provides lower deductibles.

Certain types of health coverage, like general health Flexible Spending Accounts (FSAs) or Health Reimbursement Accounts (HRAs), can disqualify you from HSA eligibility. Individuals with military health benefits, such as TRICARE, may also be ineligible.[8]

3. Not Enrolled In Medicare

Enrollment in Medicare, which typically begins at age 65, disqualifies you from contributing to an HSA. However, if you already have an HSA, you can continue to use accumulated HSA funds.

4. Not A Dependent

If you can be claimed as a dependent on someone else’s tax return, you are not eligible to contribute to your own HSA. However, as a dependent, you may be covered by someone else’s HDHP and benefit from their HSA. This is a common occurrence when a young adult is still claimed as a dependent and is covered by a parent’s HDHP. In this scenario, the parent can use HSA funds to pay for the dependent’s eligible healthcare expenses.

To fully understand the potential tax advantages and eligibility requirements, consider consulting with a tax professional.

How To Get An HSA

HSAs are sometimes offered as part of an employee benefit program. In this case, the process of opening and managing an HSA is often facilitated by your employer.

You’ll typically enroll during your employer’s open enrollment period or when you first become eligible for benefits and make contributions through payroll deductions.

You may receive a debit card you can use to pay for medical expenses directly, and your employer may have a specific process for submitting claims for out-of-pocket reimbursements.

To enroll in your own HSA, follow these steps:

  • Confirm eligibility: Begin by ensuring you are enrolled in an HSA Eligible HDHP and meet the other eligibility requirements.
  • Choose a provider: When comparing your options, consider factors such as fees, investment options, ease of access to funds, and customer service.
  • Open an account: Next, you’ll complete the provider’s application process, provide personal identification, and agree to the terms of the HSA. Some providers may allow you to open an account online, making the process quick and convenient.
  • Set up contributions: After your HSA is open, you can start making contributions, which can be done through payroll deductions if your employer offers this option or through direct deposits or lump-sum contributions.
  • Consider investment options: Some HSAs offer the option to invest some of your funds in stocks, mutual funds, or other investment vehicles. This can help you grow your HSA funds over time, especially if you don’t anticipate needing them in the short term.
  • Use your HSA funds: As you fund your HSA, you can begin using the funds for qualified medical expenses. Save your receipts and records of medical expenses in case of an IRS audit.

Each financial institution may have a slightly different process. Consider consulting with your preferred institution for more information.

Frequently Asked Questions

How Much Can You Contribute To An HSA?

In 2024, individuals with self-only coverage can contribute $4,150 to their HSAs, a 7.8% increase over the 2023 maximum. For family coverage, this limit increases to $8,300, a 7.1% increase over 2023. Individuals aged 55 or older can contribute an additional $1,000 per year.[9]

What Happens To An HSA If You Leave Your Job?

You own your HSA account, so if you leave your job, the account goes with you. HSAs are not tied to your employer, allowing you to retain control over the funds and continue to use them for qualified medical expenses, regardless of your employment status. If you’re still covered by an HDHP and meet the other eligibility requirements, you can continue making contributions to your current HSA or establish a new one.

Can I Use MY HSA For Family Members’ Medical Expenses?

Although HSAs are opened in a single person’s name, as an account holder, you can use your HSA funds to pay for eligible out-of-pocket medical expenses for your spouse or qualified dependents. This is true even if they are not covered under your HDHP as long as the expenses are not being reimbursed by another HSA or HRA.

What Happens To Unused HSA Funds?

Funds in an HSA roll over year to year, with no expiration or “use it or lose it” policy. This feature allows your HSA balance to accumulate over time, so you can use it for current or future healthcare costs and as a long-term savings vehicle. This feature makes HSAs particularly useful for healthcare expenses during retirement.

What Happens To An HSA After You Turn 65?

After you turn 65 and enroll in Medicare, you can no longer make contributions to your HSA; however, it remains active and accessible. You can also make withdrawals for non-medical expenses without facing the 20% penalty that applies to individuals under age 65, but you'll still owe income taxes on the withdrawals.

Securing Your Health And Wealth With An HSA

The ability to roll funds over from year to year, invest account balances, and pay for healthcare expenses in a tax-advantaged way makes HSAs a valuable tool for those who meet the eligibility requirements.