# Understanding Health Savings Accounts (HSAs): Benefits, Rules & Limits

![Health Savings Account (HSA): A tax-advantaged account for individuals with high-deductible health plans to save for medical expenses that those plans do not cover.](https://www.investopedia.com/thmb/jKymZNXinopaeYBFqFn7GiNl2ew=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/hsa.asp-final-9b3f314e10b44ee5b645055dd926a8ad.png)

*— Investopedia / Paige McLaughlin*

## What Is a Health Savings Account (HSA)?

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. Balances carry over each year, allowing savings to grow over time.  

### Key Takeaways

*   Health Savings Accounts (HSAs) offer a triple tax advantage: contributions are tax-free, the money can be invested and grow tax-free, and withdrawals are not taxed if used for qualified medical expenses.  
    
*   HSAs require you to have a high-deductible health plan (HDHP) but allow more flexibility than a Flexible Spending Account (FSA), with contributions that can roll over year-to-year and the option to invest funds for further growth.  
    
*   The annual contribution limits set by the IRS are $4,150 for individuals and $8,300 for families in 2024, with catch-up contributions of $1,000 available for individuals aged 55 and older.  
    
*   Withdrawals for non-qualified medical expenses are subject to income tax and a 20% penalty, although the penalty is waived for those over 65, making HSAs a potential vehicle for retirement savings.  
    

## Understanding Health Savings Accounts (HSAs)

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):

*   Have a qualified HDHP
*   Have no other health coverage
*   Not be enrolled in Medicare
*   Not be claimed as a dependent on someone else’s tax return

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 ($8,550 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](https://www.investopedia.com/terms/t/taxyear.asp) can make [catch-up contributions](https://www.investopedia.com/terms/c/catchupcontribution.asp) of an additional $1,000 to their HSAs.

You can open an HSA at select financial institutions. Contributions [must be cash](https://www.investopedia.com/transfer-ira-money-to-an-hsa-4770819), and both employees and employers can fund employer-sponsored plans. Family members can also contribute to an individual's HSA. [Self-employed](https://www.investopedia.com/terms/s/self-employed.asp) or unemployed individuals may also contribute to an HSA, provided that they meet the eligibility requirements.

Individuals who enroll in [Medicare](https://www.investopedia.com/terms/m/medicare.asp) 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.

## Important Considerations for HSAs

HDHPs have higher annual [deductibles](https://www.investopedia.com/health-insurance-deductible-4773113), 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). For 2024, the [out-of-pocket maximum](https://www.investopedia.com/terms/o/outofpocket-limit.asp) is $8,050 for individual coverage and $16,100 for families. It increases to $8,300 and $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.

### Example of HDHP

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](https://www.investopedia.com/terms/c/copay.asp).

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.

> **Important**
>
> 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.

## Exploring the Pros and Cons of HSAs

HSAs have [advantages and drawbacks](https://www.investopedia.com/articles/personal-finance/090814/pros-and-cons-health-savings-account-hsa.asp). The effect of these accounts depends on your personal and financial situations.

Pros

*   Contribution tax advantages
    
*   Distribution tax advantages
    
*   Investment options
    

Cons

*   Deductible requirements
    
*   Requires extra cash
    
*   Filing requirements
    

### Pros Explained

**Contribution tax advantages**: Employer and individual contributions by [payroll deduction](https://www.investopedia.com/articles/pf/08/payroll-deductions.asp) to an HSA are excluded from the employee’s taxable income. An individual’s direct contributions to an HSA are 100% [tax deductible](https://www.investopedia.com/terms/t/tax-deduction.asp) 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](https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp) in stocks and other securities, potentially allowing for higher returns over time.

### Cons Explained

**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.

## Making Withdrawals from Your HSA

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](https://www.investopedia.com/1099-sa-form-understanding-your-1099-sa-form-4782433) for distributions from the HSA. Here are some basics you need to know:

*   Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan.
*   [Insurance premiums](https://www.investopedia.com/terms/i/insurance-premium.asp) don’t count as a qualified medical expense unless the premiums are for Medicare or other healthcare coverage (provided you are age 65 or older); for health insurance when receiving [healthcare continuation coverage (COBRA)](https://www.investopedia.com/articles/insurance/11/intro-cobra-health-insurance.asp); for coverage when receiving unemployment compensation; or for [long-term care insurance](https://www.investopedia.com/terms/l/ltcinsurance.asp), subject to annually adjusted limits. Premiums for Medicare supplemental or Medigap policies are not treated as qualified medical expenses.

Withdrawals for non-qualified expenses are taxed as income and incur a 20% penalty. However, once an individual turns 65, the 20% tax penalty is eliminated and only income tax applies for non-qualified withdrawals.

## Key Rules for Contributing to an HSA

HSA contributions don't need to be used within the tax year. Unused funds roll over to the next year. Also, an HSA is portable, meaning that if employees change jobs, they can still keep their HSAs.

> **Tip**
>
> An HSA plan can also be transferred to a surviving spouse tax-free upon the account holder’s death.

However, if the designated [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) 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](https://www.investopedia.com/terms/f/fairmarketvalue.asp), adjusted for any qualified medical expenses of the decedent paid from the account within a year of the date of death.  

## Comparing HSAs and FSAs: Key Differences

HSAs are often compared to [Flexible Spending Accounts (FSAs)](https://www.investopedia.com/terms/f/flexiblespendingaccount.asp). While both accounts can be used for medical expenses, [some key differences exist](https://www.investopedia.com/insurance/hsa-vs-fsa/) between them:

*   FSAs are employer-sponsored plans and are not portable if you change jobs.
*   Only employed individuals can sign up for FSAs.
*   Unused FSA funds don't roll over and are lost after the tax year ends.
*   Your elected contribution amount for an FSA is fixed, while HSA contributions can be flexible.

The maximum contribution for an FSA for the 2024 tax year is $3,200.

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

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.

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

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.

## Can I Pay My Insurance Premiums with My HSA Funds?

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 limits.  

## The Bottom Line

HSAs are one of the best tax-advantaged [savings and investment tools](https://www.investopedia.com/investing-in-hsa-vs-401k-5272337) available under the U.S. tax code. They are often referred to as triple tax-advantaged because:

*   Contributions are not subject to tax.
*   The money can be invested and grown tax free.
*   Withdrawals are not taxed as long as you use them for qualified medical expenses.

As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Therefore, [starting an HSA early if you qualify](https://www.investopedia.com/experts-share-top-tax-savings-tips-8417232)—and allowing it to accumulate over a long period—can benefit your financial future.

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