What Is a Health Savings Account (HSA)?

Health Savings Account Explained

A pharmacist looks at a debit card while a woman waits on the other side of the counter.
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Definition

A health savings account (HSA) is a tax-advantaged account that allows you to save money for future health care expenses. Health savings accounts are associated with high-deductible health plans (HDHPs).

Key Takeaways

  • A health savings account (HSA) is a tax-advantaged account designed to be used to save for future health care expenses.
  • HSAs are associated with high-deductible health plans, so if you don’t have that type of health plan, you likely don’t have access to an HSA.
  • An HSA offers triple tax benefits, including tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified health care expenses.
  • Your employer may offer a matching contribution if you have an HSA through your health insurance plan at work.

How Does a Health Savings Account (HSA) Work?

A health savings account is a special savings account that is meant to be used for health care expenses. These accounts can be offered with high-deductible health plans and are funded with pretax dollars. That means the money can come out of your paycheck before taxes are taken out of your pay, and you can stash it away until you need it for a medical expense.

The money you save in your health savings account can be used for qualified medical expenses. The Internal Revenue Service (IRS) determines which expenses qualify. Many over-the-counter medicines are covered, too.

Examples of qualified medical expenses include:

  • Ambulance services
  • Artificial limbs
  • Birth control
  • Breast pumps
  • Contact lenses and eye exams
  • Drug treatment
  • Fertility enhancement
  • Guide dogs
  • Lab fees
  • Long-term care
  • Medications
  • Nursing home care and nursing services
  • Physical exams
  • Pregnancy tests
  • Surgery
  • Therapy
  • Vision correction
  • Weight-loss programs

Health savings accounts are funded through contributions from the insured person. The amount you can contribute depends on whether you have individual or family coverage. Contribution amounts can change from tax year to tax year. The IRS sets the annual contribution limits for HSAs, and they're adjusted regularly for inflation.

For example, in 2022, HSA contribution limits were $3,650 for individuals and $7,300 for someone with health coverage for the whole family. For 2023, contribution limits are $3,850 for individual plans and $7,750 for family plans.

Note

Employers can offer matching contributions to an HSA, but any combined employer-employee contributions cannot exceed the annual limit for coverage type.

Tax Benefits of an HSA

HSAs are tax-advantaged accounts. That means they offer certain tax benefits to those who choose a high-deductible health plan. These tax benefits include:

  • Tax-deductible contributions
  • Tax-deferred growth
  • Tax-free withdrawals when used for qualified medical expenses

Money in an HSA rolls over from year to year, too. So if you make contributions this year, for example, but have no medical expenses in which you need to use HSA money, the funds in your account will be there next year. The money will even stay in your HSA account if you change employers. You can invest your HSA contributions, too, so they can earn interest and grow even more.

Note

Health savings accounts typically offer a debit card for convenient access, and there’s likely an online account you can use to check your balance, request withdrawals, and more.

Example of a Health Savings Account

Let’s say you get a job with a new employer that offers a high-deductible health plan. The plan includes a health savings account. You contribute $1,000 to your HSA each year, and you withdraw that money as needed to pay for contact lenses and prescription drugs.

You use your debit card connected to your HSA to pay for these items. One day, you forget to use your debit card for your prescription at the pharmacy. That night, you log into your account and request the money be sent to you as a reimbursement. You have to attach a receipt showing the amount you paid. Once it’s submitted, the money is sent for direct deposit into your personal checking account.

Note

You must be enrolled in a high-deductible health plan to contribute to an HSA.

HSA vs. FSA: A Quick Comparison

Health Savings Account Flexible Spending Account
Must have a high-deductible health plan May have the option to use an FSA with any health plan
All money rolls over year to year Limited amount rolls over year to year
Pretax contributions and withdrawals for qualified medical expenses Pretax contributions and withdrawals for qualified medical expenses
Annual contribution limits Annual contribution limits

An HSA is a health savings account. An FSA is a flexible spending account. HSAs are offered with high-deductible health plans. FSAs may be offered separately from your health insurance plan. HSA money rolls over year to year, while the money that can roll over in an FSA is limited. Both allow you to contribute money pretax from your paycheck, and the money can be used for qualified medical expenses. Both accounts have annual contribution limits. Depending on your situation, an HSA or an FSA may be better for you and your family.

How To Get a Health Savings Account

Health savings accounts can be offered by banks, credit unions, brokerages, and other financial institutions. Again, you must be eligible to contribute to an HSA in order to get one. According to IRS rules, you qualify for an HSA if you:

  • Are covered under a high-deductible health plan
  • Have no other health coverage
  • Are not enrolled in Medicare
  • Cannot be claimed as a dependent on someone else's tax return

You can talk to your employer about whether an HSA is included with your workplace health insurance coverage. If you're self-employed and pay for your own health insurance, you can review the details of your plan to see if you have the option to set up an HSA.

Assuming that you're eligible, you can enroll in the plan and begin making contributions up to the allowed annual limit. Your HSA may allow for automatic contributions, which is a plus if you're more of a hands-offer saver.

Money in a health savings account can be withdrawn tax-free if you're using it to pay qualified medical expenses. If you take money from an HSA to pay for anything other than qualified health care expenses, you'll pay a 20% tax penalty and income tax on the distribution.

Note

The 20% tax penalty for non-medical expense withdrawals goes away when you turn 65, but you'll still owe income tax.

Frequently Asked Questions (FAQs)

What can you use health savings accounts for?

Health savings accounts can be used to pay for qualified medical expenses. The IRS maintains a lengthy list of expenses that you can pay for using HSA funds. Using HSA money to pay for ineligible expenses can result in a tax penalty.

Who offers health savings accounts?

Health savings accounts are offered with high-deductible health plans, including employer-sponsored plans and plans from the federal Health Insurance Marketplace. HSAs can be held and administered by banks, brokerages, and other financial institutions on behalf of the insurance company.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Publication 502, Medical and Dental Expenses.”

  2. IRS. “26 CFR 601.602: Tax Forms and Instructions (2022).”

  3. IRS. “26 CFR 601.602: Tax Forms and Instructions (2023)."

  4. IRS. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.”

  5. PayFlex. “Health Savings Accounts (HSAs).”

  6. HealthCare.gov. “Using a Flexible Spending Account (FSA).”

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