:max_bytes(150000):strip_icc()/hsa.asp-final-9b3f314e10b44ee5b645055dd926a8ad.png)
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated July 22, 2024 Reviewed by Reviewed by Thomas J. CatalanoThomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Fact checked by Fact checked by Betsy PetrickBetsy began her career in international finance and it has since grown into a comprehensive approach to journalism as she's been able to tap into that experience along with her time spent in academia and professional services.
Part of the Series Medical Savings and Spending AccountsTypes of Accounts
How The Accounts Differ
All About Flex Spending Accounts
All About Health Savings Accounts
A Health Savings Account (HSA) is a tax-advantaged account created for or by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year.
The contributions to an HSA are invested over time and can be used to pay for qualified medical expenses, such as medical, dental, and vision care and prescription drugs.
Individuals who have an HDHP may qualify to open a Health Savings Account (HSA), and the two are usually paired together. To qualify for an HSA , you must meet these eligibility standards established by the Internal Revenue Service (IRS)::
The maximum contribution for an HSA in 2024 is $4,150 for an individual (rising to $4,300 for 2025) and $8,300 for a family ($8,600 in 2025). The annual limits on contributions apply to the total amounts contributed by both the employer and the employee. Individuals age 55 or older by the end of the tax year can make catch-up contributions of an additional $1,000 to their HSAs.
An HSA can also be opened at certain financial institutions. Contributions can only be made in cash, while employer-sponsored plans can be funded by the employee and their employer. Any other person, such as a family member, can also contribute to the HSA of an eligible individual. Self-employed or unemployed individuals may also contribute to an HSA, provided that they meet the eligibility requirements.
Individuals who enroll in Medicare can no longer contribute to an HSA as of the first month of enrollment. However, they can receive tax-free distributions for qualified medical expenses.
HDHPs have higher annual deductibles, which means the plan pays nothing until you reach these amounts in out-of-pocket expenses. However, it also has lower premiums than other health plans. The financial benefit of an HDHP’s low-premium and high-deductible structure depends on your personal situation.
The minimum deductible required to open an HSA is $1,600 for an individual or $3,200 for a family for the 2024 tax year ($1,650 and $3,300, respectively, for 2025). The plan must also have an annual out-of-pocket maximum of $8,050 for self-coverage for the 2024 tax year ($8,300 for 2025) and $16,100 for families for the 2024 tax year ($16,600 for 2025).
When you pay qualified medical expenses equal to a plan’s deductible amount, additional qualified expenses are divided between you and the plan.
For example, the insurer may cover a percentage of the qualified expenses per the contract (usually 80% to 90%), while you may pay the remaining 10% to 20% or a specified co-pay.
So, if you had an annual deductible of $1,600 and a medical claim of $3,500, you would pay the first $1,600 to cover the deductible for the year. You would then pay 10% to 20% of the remaining $1,900, and the insurance company would cover the rest.
Once the annual deductible is met in a given plan year, the plan typically covers any additional medical expenses, except for costs not covered under the contract (such as co-pays). The insured can withdraw money accumulated in an HSA to cover these out-of-pocket expenses.
Health savings accounts should not be confused with health spending accounts, which employers use in Canada to provide health and dental benefits for their Canadian employees.
HSAs have advantages and drawbacks. The effect of these accounts depends on your personal and financial situations.
Contribution tax advantages: Employer and individual contributions by payroll deduction to an HSA are excluded from the employee’s taxable income. An individual’s direct contributions to an HSA are 100% tax deductible from the employee’s income. Earnings in the account are also tax-free. However, excess contributions to an HSA incur a 6% tax and are not tax deductible.
Distribution tax advantages: Distributions from an HSA are tax-free, provided that the funds are used for qualified medical expenses as outlined by the IRS. Distributions used for medical expenses covered under the HDHP plan are included in determining if the HDHP’s deductible has been met.
Investment options: You can also invest the money in your HSA in stocks and other securities, potentially allowing for higher returns over time.
Deductible requirements: The most obvious key drawback is that you need to be a good candidate for an HDHP. In addition, you must have a high-deductible plan, lower insurance premiums, or be able enough to afford the high deductibles and benefit from the tax advantages.
Requires extra cash: Individuals who fund their own HSAs, whether through payroll deductions or directly, should be financially capable of setting aside an amount that would cover a substantial portion of their HDHPs’ deductibles. Individuals without enough spare cash to set aside in an HSA may find the high deductible amount burdensome.
Filing requirements: HSAs also come with regulatory filing requirements regarding contributions, specific rules on withdrawals, distribution reporting, and other factors. This creates a record-keeping burden that may be difficult to maintain.
Amounts withdrawn from an HSA aren’t taxed as long as they are used to pay for services that the IRS treats as qualified medical expenses. The plan's manager will issue an IRS Form 1099-SA for distributions from the HSA. Here are some basics you need to know:
If distributions are made from an HSA to pay for anything other than a qualified medical expense, that amount is subject to both income tax and an additional 20% tax penalty. However, once an individual turns 65, the 20% tax penalty is eliminated and only income tax applies for non-qualified withdrawals.
Contributions made to an HSA do not have to be used or withdrawn during the tax year. Instead, they are vested, and any unused contributions can be rolled over to the following year. Also, an HSA is portable, meaning that if employees change jobs, they can still keep their HSAs.
An HSA plan can also be transferred to a surviving spouse tax-free upon the account holder’s death.
However, if the designated beneficiary is not the account holder’s spouse, then the account is no longer treated as an HSA. The beneficiary is then taxed on the account’s fair market value, adjusted for any qualified medical expenses of the decedent paid from the account within a year of the date of death.
The HSA is often compared with the Flexible Spending Account (FSA). While both accounts can be used for medical expenses, some key differences exist between them:
The maximum contribution for an FSA for the 2024 tax year is $3,200).
You can open a Health Savings Account (HSA) if you have a high-deductible health plan. If you are self-employed, you can look into HSAs offered by brokerages or banks such as Fidelity, HealthEquity, or Lively. Research your options carefully to ensure you get the best HSA to suit your needs.
Unlike a Flexible Spending Account (FSA), contributions to your Health Savings Account (HSA) can roll over from year to year. Since the funds can also be invested, you can build capital for more significant medical needs or as an investment fund after retirement.
In most cases, you cannot pay for premiums with Health Savings Account (HSA) funds. HSAs can be used for most medical expenses, such as doctor’s appointments, prescriptions, or over-the-counter medications, but not your monthly premium. The only exceptions to this rule are when the funds are used to pay Medicare premiums or for healthcare continuation coverage (such as COBRA) while you’re on unemployment compensation. You may also pay for long-term care insurance using your HSA, subject to certain lilmits.
HSAs are one of the best tax-advantaged savings and investment tools available under the U.S. tax code. They are often referred to as triple tax-advantaged because:
As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Therefore, starting an HSA early if you qualify—and allowing it to accumulate over a long period—can benefit your financial future.
