A health savings plan, commonly called a health savings account (HSA), is a tax-advantaged account designed to help you save and pay for medical expenses. It works like a personal bank account, but the money you put in, the growth it earns, and the withdrawals you make for medical costs are all free from federal income tax. To open one, you need to be enrolled in a high-deductible health plan (HDHP), which is a health insurance plan with a higher annual deductible than most standard plans.
How the Triple Tax Advantage Works
The HSA’s defining feature is its three-layer tax benefit, sometimes called the “triple tax advantage.” First, contributions are tax-free. If you contribute through payroll deductions, the money also avoids Social Security and Medicare taxes, which means the savings are even larger than a standard tax deduction. Second, any interest or investment growth inside the account is tax-free. Third, withdrawals used for qualified medical expenses are never taxed.
No other account in the U.S. tax code offers all three of these benefits simultaneously. A 401(k), for instance, gives you a tax break on contributions but taxes withdrawals. A Roth IRA taxes contributions but lets you withdraw tax-free. An HSA does both, as long as you spend the money on eligible healthcare costs.
Eligibility Requirements
You can only contribute to an HSA if you’re covered by a qualifying high-deductible health plan and have no other non-HDHP health coverage. An HDHP is defined by the IRS each year based on minimum deductible amounts and maximum out-of-pocket spending limits. These thresholds are updated annually for inflation, so the specific dollar figures change from year to year. Your employer or insurance marketplace will typically label a plan as “HSA-eligible” if it qualifies.
You also cannot be enrolled in Medicare. Once you sign up for Medicare Part A or Part B, you must stop making new contributions to your HSA. This is worth planning around carefully: when you enroll in Medicare Part A, you receive up to six months of retroactive coverage. That means you should stop contributing to your HSA at least six months before you enroll in Medicare to avoid a tax penalty. And because most people collecting Social Security are automatically enrolled in Medicare Part A, you’d need to delay Social Security benefits too if you want to keep contributing past age 65.
Contribution Limits
The IRS sets annual caps on how much you can put into an HSA, with separate limits for individual and family coverage. These limits include both your own contributions and anything your employer adds on your behalf. If you’re 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.
In practice, most people contribute well below the maximum. Data from the Employee Benefit Research Institute shows that in 2022, the average employee contribution was $1,962 and the average employer contribution was $762. If your employer does contribute to your HSA, that’s essentially free money on top of your salary, so it’s worth checking what your benefits package includes.
What You Can Spend It On
HSA funds cover a broad range of medical, dental, and vision expenses. Qualifying costs include doctor visits, prescriptions, dental treatment, eyeglasses, contact lenses, hearing aids, chiropractic care, mental health services, and even acupuncture. Breast pumps, ambulance services, and artificial limbs also qualify. Prescription drugs are covered, and insulin is specifically eligible even without a prescription.
Over-the-counter drugs generally do not qualify unless they’re prescribed by a doctor (with the exception of insulin). Cosmetic procedures, gym memberships, and most supplements are not eligible either. The IRS publishes a detailed list each year in Publication 502 if you want to check a specific expense.
What Happens With Non-Medical Withdrawals
If you withdraw money from your HSA for something other than a qualified medical expense before age 65, you’ll owe income tax on the amount plus a 20% penalty. That’s a steep price, which is why HSAs work best when reserved for healthcare costs.
After age 65, the penalty disappears entirely. You can take money out for any reason and simply pay regular income tax on it, similar to how a traditional 401(k) or IRA works. This is one reason financial planners sometimes describe the HSA as a powerful retirement tool: if you don’t need the money for medical expenses, it still functions as a flexible retirement account after 65. And if you do use it for healthcare in retirement, the withdrawals remain completely tax-free.
Investing Your HSA Balance
Most HSA providers allow you to invest your balance in mutual funds, index funds, or other options once you meet a minimum cash balance requirement. A common threshold is $1,000, meaning you’d need to keep at least that much in cash and can invest everything above it. If your balance dips below the minimum, you won’t be able to make new investments until you build it back up.
Investing makes the most sense if you’re treating your HSA as a long-term savings vehicle rather than spending from it each year. The tax-free growth means that over decades, an invested HSA can accumulate significantly more than one sitting in cash. Some people choose to pay current medical bills out of pocket and let their HSA investments compound for years, since there’s no deadline for reimbursing yourself as long as you keep receipts.
How an HSA Differs From an FSA
Health savings accounts are often confused with flexible spending accounts (FSAs), but the differences are significant. An FSA is owned by your employer. If you change jobs, you typically lose access to it. An HSA is individually owned and fully portable, meaning it stays with you no matter where you work or whether you’re employed at all.
The biggest practical difference is what happens to unused money. HSA funds roll over indefinitely with no limit. You never lose a dollar you’ve deposited. FSA funds, by contrast, generally expire at the end of the plan year. Some employers offer a grace period of up to 2.5 extra months or allow a small carryover (up to $660 for 2025), but anything beyond that is forfeited. This “use it or lose it” pressure is the main reason many people prefer HSAs when they have the choice.
- Ownership: HSAs belong to you. FSAs belong to your employer’s plan.
- Rollover: HSA balances roll over completely every year. FSA balances mostly expire.
- Portability: HSAs move with you between jobs and into retirement. FSAs typically end when you leave.
- Investment: HSA funds can be invested for long-term growth. FSA funds cannot.
- Eligibility: HSAs require a high-deductible health plan. FSAs are available with most employer-sponsored plans.
What Happens to Your HSA When You Die
When you open an HSA, you should name a beneficiary. If your spouse is the beneficiary, the account simply becomes their HSA and retains all its tax advantages. They can continue using it for their own medical expenses exactly as you would have.
If you name a non-spouse beneficiary, the account stops being an HSA entirely. Its full fair market value becomes taxable income to that person in the year you die. The one exception: if the beneficiary pays any of your remaining qualified medical expenses within one year of your death, those amounts reduce the taxable total. If your estate is the beneficiary instead, the value is included on your final tax return.
Using Your HSA Alongside Medicare
Even though you can’t contribute new money to an HSA once you’re on Medicare, you can still spend what’s already in the account. Withdrawals for qualified medical expenses remain tax-free, and the list of eligible expenses is generous in retirement. You can use HSA funds to pay Medicare premiums, deductibles, copayments, and coinsurance. For many retirees, an HSA built up over working years becomes a dedicated pool of tax-free money for healthcare costs that Medicare doesn’t fully cover.