What Is a Health Savings Account?

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In the landscape of healthcare financing, individuals and families seeking innovative ways to efficiently manage their medical expenses now have several options. One of those is a health savings account (HSA), a type of tax-advantaged financial instrument that allows you to pay for certain healthcare costs.

As medical costs continue to rise, the popularity of HSAs is increasing in the United States. At the end of 2022, Americans had $104 billion saved in these types of accounts. By 2025, it’s estimated that that figure will climb to $149.7 billion.

Read on to learn about HSAs, how they work, their pros and cons and whether or not they're a good fit for your savings and health care goals.

Table of contents

• What is a health savings account?
• How does a health savings account work?
• HSA pros and cons
• How to open an HSA
• What is a health savings account FAQs
• Summary of Money's What Is A Health Savings Account?

What is a health savings account?

An HSA is a hybrid account that combines the benefits of a savings account with the flexibility of using tax-free funds for qualified medical expenses such as deductibles, copayments, coinsurance and more.

HSAs allow you to lower your taxable income while the funds in the account grow tax-free. Distributions — so long as they’re used for qualified medical expenses — are also tax-free.

HSA accounts are available to participants enrolled in high-deductible health plans (HDHPs), Medicare recipients, or those not claimed as dependents on someone else’s tax return. Contributions to these accounts can be made either independently or as payroll deductions.

Additionally, HSAs allow account holders to invest funds, which can also grow tax-free, once they’ve surpassed a given threshold.

What can I use my HSA for?

An HSA can be used for a wide variety of qualified medical expenses, including but not limited to:

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HSA vs. PPO

Whereas an HSA is a type of account, a preferred provider organization (PPO) provides users access to a network of healthcare providers, generally at reduced prices. PPOs are managed care organizations of medical doctors, healthcare facilities and healthcare providers.

Because an HSA isn’t a healthcare plan, it can be used to pay for medical expenses incurred through a PPO so long as the PPO is an HSA-eligible HDHP.

HSA vs. FSA

A flexible spending account (FSA) is similar to an HSA in that it allows users to save pre-tax income for qualified medical expenses. However, unlike an HSA, an FSA doesn’t require an HDHP.

Instead, FSAs are owned by employers rather than individuals, meaning they’re subject to "use it or lose it" rules. The funds in an FSA must be exhausted annually (or within a grace period for rollover amounts), and if you change jobs, the money cannot be rolled over to a new account.

There are differences in annual contribution limits as well. For 2024, the HSA contribution limit is $4,150 for individuals and $8,300 for families. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up contribution, while couples can contribute an extra $2,000.

In contrast, healthcare FSAs are limited to $3,200 in 2024, while dependent care FSAs are capped at $2,500 for individuals or $5,000 per household.

Lastly, you are unable to invest the funds saved in an FSA, whereas an HSA permits account holders to invest any money in excess of the investment threshold.

How does a health savings account work?

An HSA allows you to put money away and withdraw it tax-free as long as you use it for qualified medical expenses like deductibles, copayments, coinsurance and other healthcare costs.

Contributions to the account are made via direct payroll deductions (pre-tax contributions) or independently (tax-deductible) by either depositing online or mailing a check.

Unspent funds in an HSA can be rolled over from year to year, and you are allowed to withdraw money from your account at any time.

What is an HSA card?

You can pay for qualified healthcare expenses with an HSA card. Unlike medical credit cards, HSAs provide account holders with debit cards after opening and funding an account. These cards enable you to use your HSA funds at the point of sale without having to concern yourself with reimbursement processes.

Like many regular debit cards, your HSA card could carry daily spending or transaction limits.

What is an HSA distribution?

An HSA distribution is simply a withdrawal of funds from your HSA account. Distributions used for eligible medical expenses are tax-free. According to the IRS:

• Taxpayers must keep records to show that HSA distributions were used to pay or reimburse qualified medical expenses and that the medical expense had not been taken as an itemized deduction in any year.

• Taxpayers are not required to take annual distributions from their HSA.

• Taxpayers who have taken HSA distributions will receive Form 1099-SA, Distributions From an HSA, Archer MSA or Medicare Advantage MSA, from their HSA trustee and must provide it before the return can be completed.

For recordkeeping requirements on HSA distributions, see the Distributions From an HSA subsection in Publication 969. You will be subject to income tax and a 20% penalty for distributions used for non-qualified medical expenses.

There are exceptions to this rule if the funds are used:

• At age 65 or older
• If you are disabled
• In the year of your death

How to get reimbursed from an HSA

If you pay for qualified medical expenses out of pocket, you can use your HSA to reimburse yourself. That can usually be done through an HSA provider’s website or app.

Reimbursements are usually made if the cost of the qualified medical expense exceeds the balance of the HSA, and there are no time limits on when you can submit a claim for reimbursement so long as the HSA was opened prior to incurring the medical expense.

Pros of health savings accounts

Triple tax-advantaged

HSAs are triple tax-advantaged, meaning (1) you aren’t taxed on the money you deposit into the account, (2) you aren’t taxed on the interest earned in the account and (3) you aren’t taxed on distributions made for qualified medical expenses.

Additionally, contributing to your HSA with pre-tax dollars through payroll deductions reduces your annual taxable income.

Can be used for spouses and dependents

In addition to using your HSA to pay for your qualified medical expenses, you can use the account to pay for HSA-eligible healthcare costs incurred by your spouse or dependents. This remains true even if your HDHP doesn’t cover them.

Stays with you if you change jobs or retire

Unlike an FSA — which is owned by an employer, has "use it or lose it" rules and cannot move with you from job to job — you are the owner of an HSA and have access to the funds in it no matter where you are employed and regardless of whether or not you’re retired.

Funds can be invested

Similar to a tax-advantaged individual retirement account (IRA), you can invest the funds in your HSA and any potential gains won't be taxed. This can be done once your HSA balance exceeds the investment threshold established by the financial institution where you hold the account. Once you meet that minimum, any funds above that amount can be invested.

One benefit of investing the funds in your HSA is that — unlike a 401(k) or traditional IRA — you aren’t forced to take required minimum distributions (RMDs) from your HSA. However, it’s important to remember that, like any investment, using your HSA funds in this manner exposes them to risk over time.

Cons of health savings accounts

Must be enrolled in a high deductible health plan (HDHP)

If you aren’t enrolled in an HDHP, you’re ineligible for an HSA. HSA-eligible high-deductible health insurance plans must set a minimum deductible as well as a maximum amount on out-of-pocket expenses.

Per IRS guidelines for 2024, an HDHP must have a deductible of at least $1,600 for an individual or $3,200 for a family, with an out-of-pocket limit of $8,050 for individuals or $16,100 for a family.

Taxes and penalties for unqualified medical expense distributions before age 65

You can take penalty-free withdrawals from your IRA after age 65. However, you will face two penalties if you do so before that age. First, that money will be subject to taxes at your ordinary income tax rate. Second, you will incur a 20% tax penalty on the amount withdrawn.

Medicare recipients cannot contribute

Even though you can maintain and continue to use your HSA after retirement, once you enroll in Medicare, you’re no longer eligible to contribute to your HSA.

However, if you’re enrolled in Medicare and your spouse is not, or vice versa, either or both partners can make tax-deductible contributions to the HSA plan so long as one remains HSA-eligible.

Medicare enrollment is not automatic upon retiring, so plan accordingly before becoming a recipient.

How to open an HSA

Step 1: The first step in opening an HSA is enrolling in an HDHP. Whereas an FSA is only offered through an employer, you can open an HSA with any HDHP, whether or not an employer provides it.

Step 2: Determine if your employer offers an HSA with its HDHP. If so, you can open the account and set up automatic payroll deductions to fund it.

Step 3: If your employer doesn’t offer an HSA, you can research financial institutions that do. Many major and regional banks and credit unions offer HSAs to their customers. Be sure to compare fees and balance requirements before deciding which best suits your needs.

How to contribute to an HSA

For employer-provided HSAs, contributions can be recurring and are made with pre-tax dollars from payroll deductions.

If you find an HSA independent of your employer, your contributions are still tax-advantaged; however, you’ll need to report those contributions on your federal income tax return to maximize the benefits of an HSA.

Summary of Money's What Is a Health Savings Account?

An HSA is a financial instrument that combines the benefits of a savings account with tax advantages for qualified medical expenses. To open one, you must be enrolled in an HDHP through your employer or independently.

Once the account is funded, you can use it to pay for qualified healthcare costs, reimburse yourself for out-of-pocket expenses or invest any amount above an investment threshold established by the financial institution offering the account.

Though you need an HDHP to open an HSA, you can maintain the account and continue to use it for qualified medical expenses after leaving a job or retiring.