What is a Health Savings Account?

A health savings account is a savings account that typically earns interest and is designated to pay for medical costs. 

Health savings accounts were developed as companions to high-deductible health plans (HDHPs). The deductible is the amount an insurance policyholder must pay before their insurance coverage will start paying, and HDHPs have a higher deductible than a typical health plan. In 2023, individual health plans with a minimum deductible of $1,500 are considered HDHPs, and family health plans with a deductible of at least $3,000 are considered HDHPs. 

For people who don’t need a lot of medical care, a high deductible health plan can be a good choice because their monthly premiums are lower. However, when they do need healthcare, consumers with HDHPs are responsible for paying more healthcare costs out of pocket before their health coverage kicks in. As health insurance deductibles have risen in recent years, health savings accounts have become important for helping consumers cover those high deductibles.

Who qualifies for an HSA?

HSAs are administered by financial organizations that are approved by the IRS, including many banks and investment brokerage firms. To open one of these accounts, you must meet the following requirements: 

• Be covered by a high-deductible health plan (HDHP)

• Not have any other health insurance

• Not have Medicare (

• Not be a dependent on someone else’s income tax return

Many people open an HSA through their employee benefit offerings, but you can also open an HSA on your own, without an employer. You can get a health savings account whether you are employed, unemployed, or self-employed. 

How does an HSA work?

An HSA works with an HSA-eligible health plan, or HDHP. If you enroll in a high-deductible health plan, you can open and contribute to an HSA. The contributions you make to your health savings account are tax deductible. 

In addition to your own contributions to your HSA, your employer may also make contributions to your health savings account. The funds in your HSA can be invested as you choose, and the growth on those funds is also tax-free. 

When you have medical bills and healthcare expenses, you can pay them directly from the funds in your health savings account. As long as you use the money for eligible healthcare expenses, you will not have to pay any tax on that income. If you don’t use the funds in your health savings account, they can continue to grow. 

Health savings accounts rules

There are rules governing how you can spend the money in a health savings account in order to maximize the tax savings, but the list of eligible expenses is quite long. For example, some purchases that you can use HSA money for include: 

• Acupuncture

• Chiropractic care

• Ambulance services

• Flu vaccines

• Contact lenses

• Crutches

• Making changes to your home to accommodate a wheelchair

A full list is available from the IRS.

You can also use HSA money to pay for long-term care insurance and health care coverage while you’re on unemployment, Medicare, or other health care coverage if you’re 65 or older. However, you can’t use your HSA funds to pay for your regular health insurance premiums. 

If you use the funds in your HSA for anything other than eligible medical expenses, you will have to pay taxes on the withdrawal, as well as a penalty. The IRS charges a penalty of 20% on any withdrawal that is not used for eligible health expenses. So if you took $500 out of your HSA for a non-medical use, you’d have to pay a $100 penalty. 

HSA contribution limits 

The IRS sets limits for the amount you can contribute to a health savings account each year. In 2023, a person with an individual HSA-eligible health plan can contribute up to $3,850 to an HSA. If you have a high-deductible health plan for your family, you can contribute up to $7,750 to an HSA. Those limits will increase from $3,650 and $7,300 in 2022.

Also, people who are 55 or older by the end of 2023 can contribute an additional $1,000 to their health savings accounts, for a total of $4,850 for individuals and $8,750 for families.

If your employer contributes to your health savings account, their contributions are counted towards the limit. So if your employer contributes $1,000 to the HSA of a person with an individual health plan, that person can only contribute an additional $2,850 for the year.

Are HSA contributions tax deductible? 

Yes, contributions to your health savings account can be deducted from your taxable income. Actually, when used correctly, HSAs offer triple tax advantages. Here’s how: 

• The contributions you add to your health savings account are tax deductible. 

• Any interest or investment returns earned on the funds in your HSA is not taxed. 

• The funds you withdraw from your HSA to pay for eligible health expenses is not taxed.

With three opportunities to save on taxes, health savings accounts offer the most tax advantages of any long-term savings or retirement vehicle. 

Does HSA roll over? 

Another perk of health savings accounts is that the funds roll over from year to year, so you don’t have to worry about losing it if you don’t spend it. The money in your HSA, whether contributed by you or your employer, always belongs to you. 

Obviously, you can use your HSA to cover health and medical costs. But you don’t have to. You can also allow the funds to keep growing and use the account as part of your retirement savings. 

Once you reach the age of 65, you no longer have to pay a penalty if you use the money in your health savings account for something other than qualified medical expenses. The only catch is that if the funds are not used for medical expenses, they are viewed as income so you will have to pay income taxes on any withdrawals. 

FSA vs HSA 

Sometimes people confuse HSAs with FSAs, which are flexible spending accounts. While both may be offered as part of your employee benefits package, and both can help cover the costs of healthcare, HSAs and FSAs are not the same thing.

The main difference is that you, the account owner, actually own and control your HSA, while an employer owns and controls your FSA. A flexible spending account has to be set up by an employer, while an individual can set up his or her own health savings account. Also, if you leave your job, you can take your health savings account with you and roll it into another HSA, but your FSA may stay with your employer. 

With a flexible spending account, the funds do not roll over from year to year; if you don’t use them by the end of the year, you may lose them. (Some employers allow you to roll over $500 in an FSA from one year to the next, or provide a grace period of two and a half months to use the funds.)

How to start an HSA account

If you are covered by a high deductible health plan and you want to open a health savings account, first check with your employer to find out if they provide HSA contributions. If so, you’ll probably want to set up your HSA through your employer’s provider, so that you can take advantage of any money you’ll get from employer contributions.

If you are self-employed or unemployed and covered by an HDHP, you can set up your own health savings account in the same way you would open any bank account. Choose a bank or financial institution that offers HSAs and simply apply for an account. You may have to have a minimum contribution to start the account, and then you can set up automatic contributions or make periodic contributions to the HSA. Over time, as your balance grows, you can begin using your HSA to help cover the costs of medical care or planning for retirement.