What Is a Health Savings Account (HSA)?

What Is a Health Savings Account (HSA)?

Let me explain what a Health Savings Account (HSA) really is. It's a tax-advantaged account that you or your employer can set up if you're covered by a high-deductible health plan (HDHP), specifically to save for qualified medical expenses. You make contributions up to a yearly limit, and these can come from you, your employer, or both.

Over time, the money in your HSA gets invested, and you can use it to cover things like medical, dental, vision care, and prescription drugs that qualify.

Key Takeaways

Here's what you need to know right away: An HSA helps you save for medical costs not covered by your HDHP, with no taxes on contributions, earnings, or distributions for qualified expenses. You own the account, but it can be funded by you, your employer, or both. Plus, any unused balance carries over to the next year.

How an HSA Works

If you have an HDHP, you might qualify for an HSA, and they're often paired together. To be eligible according to the IRS, you need a qualified HDHP, no other health coverage, not enrolled in Medicare, and not claimed as a dependent on someone else's tax return.

For 2024, the max contribution is $4,150 for individuals (up to $4,300 in 2025) and $8,300 for families ($8,550 in 2025). These limits cover total contributions from both you and your employer. If you're 55 or older by year-end, add a $1,000 catch-up contribution.

You can open an HSA at certain banks or financial institutions. Contributions are cash only, but employer plans allow funding from both sides. Family members or anyone else can contribute if you're eligible. Even if you're self-employed or unemployed, you can contribute as long as you meet the rules.

Once you enroll in Medicare, you can't contribute anymore starting that month, but you can still take tax-free distributions for qualified expenses.

HSA Special Considerations

HDHPs come with higher deductibles, meaning you pay out-of-pocket until you hit that amount, but they have lower premiums. Whether this setup benefits you depends on your situation.

For 2024, the minimum deductible is $1,600 for individuals or $3,200 for families (rising to $1,650 and $3,300 in 2025). The out-of-pocket max is $8,050 for self-coverage ($8,300 in 2025) and $16,100 for families ($16,600 in 2025).

After meeting the deductible, you and the plan split additional costs. For example, if your deductible is $1,600 and you have a $3,500 claim, you pay the first $1,600, then maybe 10-20% of the remaining $1,900, with the insurer covering the rest. Once the deductible is met for the year, the plan usually covers more, but you can use your HSA for any out-of-pocket costs like co-pays.

Don't mix this up with health spending accounts in Canada, which are employer tools for health and dental benefits there.

Advantages and Disadvantages of an HSA

HSAs have their upsides and downsides, and how they work for you depends on your finances and health needs.

Withdrawals Permitted Under an HSA

You won't pay taxes on HSA withdrawals if they're for IRS-qualified medical expenses. The account manager sends you a Form 1099-SA for distributions.

Qualified expenses include deductibles, dental, vision, prescriptions, co-pays, psychiatric care, and other uncovered medical costs. Insurance premiums usually don't qualify, except for Medicare (if 65+), COBRA during unemployment, or long-term care insurance within limits. Medigap premiums don't count.

If you use funds for non-qualified stuff, you pay income tax plus a 20% penalty. After 65, the penalty drops, but income tax still applies.

HSA Contribution Rules

You don't have to use or withdraw contributions in the same tax year; they roll over and stay yours. HSAs are portable, so they follow you if you change jobs.

Upon your death, the HSA transfers tax-free to a surviving spouse. If the beneficiary isn't your spouse, it stops being an HSA, and they get taxed on its value, minus any qualified expenses paid within a year of death.

HSA vs. Flexible Spending Account

People often compare HSAs to Flexible Spending Accounts (FSAs). Both handle medical expenses, but FSAs are employer-sponsored and not portable if you switch jobs. Only employees can join FSAs, unused funds are lost at year-end, and your contribution amount is fixed. The 2024 FSA max is $3,200.

Can I Open a Health Savings Account (HSA) If I’m Self-Employed?

Yes, if you have an HDHP. As a self-employed person, check out HSAs from places like Fidelity, HealthEquity, or Lively. Do your research to pick the right one.

Do I Have to Use All of the Money in My HSA Every Year?

No, unlike an FSA, your HSA funds roll over yearly. You can invest them to build up for big expenses or even retirement.

Can I Pay My Insurance Premiums with My HSA Funds?

Generally, no—HSA funds cover medical expenses like visits, prescriptions, or OTC meds, not monthly premiums. Exceptions include Medicare premiums, COBRA during unemployment, or limited long-term care insurance.

The Bottom Line

HSAs stand out as top tax-advantaged tools in the U.S. tax code, with triple benefits: no tax on contributions, tax-free growth through investments, and tax-free withdrawals for qualified expenses. As you get older and medical costs rise, starting an HSA early and letting it grow can secure your financial future if you qualify.