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Understanding Health Savings Accounts: What They Are and How They Work

A Health Savings Account (HSA) is a savings account designed to help people pay for medical expenses. Unlike a regular savings account, an HSA offers tax advantages that can make healthcare costs less expensive. Money you put into an HSA is not taxed by the federal government, money that grows inside the account is not taxed, and withdrawals used for medical expenses are not taxed. This triple tax advantage makes HSAs unique among savings tools.

According to the Employee Benefit Research Institute, approximately 30 million Americans have HSAs as of 2023. These accounts work alongside high-deductible health plans (HDHPs), which are health insurance plans with lower monthly premiums but higher out-of-pocket costs before insurance kicks in. The HSA helps bridge that gap by providing a dedicated fund for medical expenses.

The money in an HSA belongs to you. If you change jobs, move to a different state, or change health plans, your HSA money stays with you. You control how the funds are spent and when they are spent. Some people use their HSA funds immediately for current medical costs, while others save the money for future healthcare needs, much like a retirement account specifically for medical expenses.

HSAs can cover a wide range of medical expenses, including doctor visits, prescription medications, dental work, vision care, mental health services, and medical equipment. However, they cannot be used for health insurance premiums in most cases, though there are specific exceptions for COBRA coverage, Medicare, and long-term care insurance.

Practical takeaway: Think of an HSA as a triple tax-advantaged savings tool that gives you flexibility in managing your healthcare costs while potentially reducing your overall tax burden.

The Income and Contribution Limits You Need to Know

The IRS sets annual contribution limits for HSAs, and these limits change each year based on inflation. For 2024, individuals with self-only coverage can contribute up to $4,150 per year, while families with family coverage can contribute up to $8,300 per year. These limits are higher than they were in previous years—for example, in 2019, the individual limit was $3,500 and the family limit was $7,000. It is important to check the current year's limits since they are adjusted annually.

There is an additional "catch-up" contribution available for people who are 55 years old or older. These individuals can contribute an extra $1,000 per year beyond the standard limit. This provision recognizes that people closer to retirement may want to save more for future medical expenses. So a person aged 55 or older with family coverage could contribute up to $9,300 in 2024.

Contributions can come from multiple sources. You can contribute to your own HSA, your employer can contribute on your behalf, and family members can even contribute to your HSA (though they cannot claim the deduction on their own tax return unless they are self-employed). However, the total contributed by all sources combined cannot exceed the annual limit. For example, if your employer contributes $2,000 to your HSA, you can only contribute an additional $2,150 as an individual with self-only coverage in 2024.

There are no income limits for opening or contributing to an HSA. Unlike some other tax-advantaged accounts, the IRS does not restrict HSA participation based on how much money you earn. This means high-income earners and low-income individuals alike can use HSAs, though the tax benefits are most valuable for people in higher tax brackets who benefit more from the tax deduction.

Practical takeaway: Track your HSA contributions carefully throughout the year to ensure you do not exceed the annual limit, and remember that catch-up contributions are available once you turn 55.

Coverage Requirements: Who Can Have an HSA and When

To have an HSA, you must be covered by a high-deductible health plan (HDHP). The IRS defines an HDHP based on minimum deductible amounts and maximum out-of-pocket limits. For 2024, an HDHP for individual coverage must have a deductible of at least $1,600 and an out-of-pocket maximum of no more than $3,200. For family coverage, the deductible must be at least $3,200 and the out-of-pocket maximum cannot exceed $6,400. These numbers change annually along with the contribution limits.

You must also meet certain other requirements to have an HSA. You cannot be covered by any other health insurance that is not an HDHP. This means you cannot have a traditional PPO or HMO plan at the same time as an HSA. However, there are specific types of coverage that do not disqualify you from having an HSA, including vision insurance, dental insurance, workers' compensation, disability insurance, and accident insurance. You also cannot be covered by Medicare, though there are limited situations where you might be able to use HSA funds even after enrolling in Medicare.

Many employers offer HSAs as part of their benefits packages, and these employer-sponsored HSAs are becoming increasingly common. According to the Kaiser Family Foundation, about 24 percent of workers with employer-sponsored insurance had access to an HSA in 2023, compared to just 7 percent in 2009. This growth reflects increasing use of high-deductible plans in the employer market. If your employer offers an HDHP, you typically have the opportunity to open an HSA during your enrollment period.

If you are self-employed or do not have employer coverage, you can purchase an HDHP through the individual insurance market or the Health Insurance Marketplace. Once you have HDHP coverage, you can open an HSA with a bank, credit union, or financial institution that offers these accounts. The process typically involves completing a form and providing proof of HDHP coverage.

Practical takeaway: Verify that your health plan meets HDHP requirements and that you have no disqualifying health coverage before opening an HSA account.

How HSA Funds Can and Cannot Be Used

HSA funds can be used to pay for a wide range of medical expenses that are not covered by insurance or that come with high out-of-pocket costs. The IRS maintains a detailed list of what qualifies as a medical expense. Common uses include copayments and coinsurance, deductibles, prescription medications, over-the-counter medications (such as pain relievers and allergy medicines), dental care including fillings and root canals, orthodontia, vision care including glasses and contact lenses, hearing aids and batteries, mental health and therapy services, and medical equipment such as crutches and thermometers.

HSA funds can also be used for less obvious medical expenses. These include acupuncture, chiropractic care, and certain alternative health treatments that are prescribed by a doctor. Physical therapy, occupational therapy, and speech therapy all qualify. Long-term care insurance premiums can sometimes be paid with HSA funds, subject to certain age-based limits. For example, a 50-year-old can use HSA funds for up to $4,840 in long-term care insurance premiums in 2024. Nursing home care and home healthcare services can be covered. Even some cosmetic procedures may qualify if they are medically necessary—for instance, reconstructive surgery following an accident or disease.

However, HSA funds cannot be used for certain expenses. Health insurance premiums are generally not covered, with specific exceptions for COBRA premiums, Medicare premiums once you are enrolled, and military health insurance premiums. Cosmetic procedures that are not medically necessary do not qualify. Vitamins and supplements that are taken for general health purposes are not covered, though some specific prescribed supplements for particular medical conditions may qualify. Gym memberships and general wellness services are not covered. Childcare and babysitting are not medical expenses and do not qualify, even if you need childcare to attend medical appointments.

One important rule is that you cannot be reimbursed from your HSA for expenses that are already paid by your health insurance or other health benefit plans. For example, if your insurance pays for a doctor visit, you cannot also be reimbursed from your HSA for that same visit. You can only use HSA funds to pay your out-of-pocket portion.

Practical takeaway: Keep detailed records of your medical expenses and receipts, and consult IRS Publication 502 or speak with your HSA provider if you are uncertain whether a specific expense qualifies.