Learn About Multiple Health Savings Accounts

What Are Health Savings Accounts and How They Work

A Health Savings Account, commonly called an HSA, is a savings account designed specifically for paying medical expenses. Unlike a regular bank account, an HSA offers special tax advantages that can help you save money on healthcare costs. The account is tied to a high-deductible health insurance plan, which means the insurance plan has a higher deductible than traditional plans but typically lower monthly premiums.

When you contribute money to an HSA, that money is not subject to federal income tax. This means if you put $3,000 into your HSA in a given year, you don't have to pay income tax on that $3,000. Additionally, any interest or investment earnings your HSA generates are also tax-free. When you withdraw money from the account to pay for qualified medical expenses, those withdrawals are also tax-free. This triple tax advantage—contributions, growth, and withdrawals for medical purposes—makes HSAs different from most other savings vehicles.

The mechanics of opening and using an HSA involve several steps. You must first enroll in a high-deductible health insurance plan through your employer, the health insurance marketplace, or a private insurer. Once enrolled, you can open an HSA through a bank, credit union, or insurance company that offers them. You then contribute funds to the account, either through payroll deductions if your employer offers this option or through direct deposits and transfers from your personal bank account.

The funds in your HSA remain available throughout the year to pay for medical services, prescription medications, dental work, vision care, and numerous other health-related expenses. You can pay for these expenses directly with your HSA debit card if your account provider offers one, or you can pay out-of-pocket and submit receipts for reimbursement from your HSA funds.

Practical Takeaway: Understanding that an HSA is a tax-advantaged savings tool rather than an insurance plan helps you see it as an additional financial resource alongside your health insurance. The account works best when you use it intentionally to build savings for current and future medical expenses.

Contribution Limits and Annual Changes

The IRS sets contribution limits for HSAs each year, and these limits change based on inflation adjustments. For 2024, individuals with self-only coverage can contribute up to $4,150 per year to their HSA. Those with family coverage can contribute up to $8,300 per year. These limits apply to the total amount contributed by both you and your employer combined—if your employer contributes $1,000, you can only add $3,150 more as an individual (using the 2024 self-only example).

People age 55 and older have the opportunity to contribute an additional $1,000 per year as a catch-up contribution. This means a person 55 or older with self-only coverage could contribute $5,150 in 2024. This provision recognizes that people closer to retirement may want to boost their medical savings in their final working years.

Understanding how contribution limits work year-to-year is important because the IRS publishes new limits annually, typically in late fall for the following year. In 2023, individual coverage limits were $3,850 and family coverage limits were $7,750—showing how the limits increase over time. These adjustments happen automatically to account for healthcare cost inflation.

Contribution timing also matters. You can make HSA contributions at any point during the year, but you have until the tax filing deadline of the following year (typically April 15) to make contributions for the previous tax year. For example, you could make a 2024 contribution as late as April 15, 2025. However, if you enroll in a high-deductible health plan partway through a year, special rules may limit your contributions for that year.

The consequences of exceeding contribution limits include taxes and penalties on the excess amount. If you contribute more than the annual limit, the extra money faces both income tax and an additional 6% excise tax. This makes it crucial to track your contributions carefully, especially if both you and your employer are making contributions to the same account.

Practical Takeaway: Keep a record of all contributions to your HSA throughout the year, including employer contributions, to ensure you stay within the annual limits. Set a reminder in the fall to review the new year's contribution limits published by the IRS so you can plan your contributions accordingly.

Qualified Medical Expenses You Can Pay For

HSA funds can be used to pay for a surprisingly broad range of health-related expenses. The IRS maintains a list of what counts as qualified medical expenses, and this list is more extensive than many people realize. Common qualified expenses include doctor visit copayments, deductibles, coinsurance, and out-of-pocket costs for medical care provided by physicians and other licensed healthcare providers.

Prescription medications and over-the-counter medications with a prescription count as qualified expenses. This means you can use HSA funds to pay for prescription pain relievers, antibiotics, and other medications your doctor prescribes. However, over-the-counter medications like aspirin or cold medicine generally do not count as qualified expenses unless prescribed by a doctor. One significant exception exists: over-the-counter insulin can be purchased with HSA funds without a prescription.

Dental and vision care represent major categories of qualified HSA expenses. You can use HSA funds to pay for dental cleanings, fillings, root canals, orthodontia, and dentures. Vision care covered by HSA includes eye exams, glasses, contact lenses, and laser eye surgery. These expenses often fall outside traditional health insurance coverage, making HSA funds particularly valuable for addressing them.

Mental health and behavioral health services also qualify for HSA coverage. Therapy sessions, psychiatrist visits, and mental health counseling provided by licensed professionals can be paid for with HSA funds. This includes both individual and group therapy sessions. Substance abuse treatment programs, including inpatient rehabilitation facilities, also count as qualified medical expenses.

Medical equipment and supplies round out the category of qualified expenses. This includes items like blood glucose monitors for diabetes management, hearing aids, wheelchairs, crutches, and home medical equipment prescribed by a doctor. Even seemingly minor items like bandages, first aid supplies, and heating pads may qualify in certain circumstances.

Expenses that do not qualify include cosmetic procedures that are not medically necessary, gym memberships aimed at general fitness, vitamins and supplements not prescribed by a doctor, and over-the-counter products for general wellness. Travel to receive medical care may have limited qualification depending on the circumstances.

Practical Takeaway: Keep receipts and documentation for all medical expenses you pay with HSA funds, as you may need to provide proof that expenses were qualified if ever questioned. Refer to IRS Publication 969 or the HSA provider's resource materials for specific questions about whether an expense qualifies, since the rules can be nuanced.

How HSAs Differ from Other Healthcare Savings Vehicles

Several types of healthcare-related savings accounts exist, and understanding the differences helps you determine which tools may work for your situation. Flexible Spending Accounts, often called FSAs, seem similar to HSAs at first glance but operate quite differently. Like HSAs, FSAs allow pre-tax contributions for medical expenses. However, FSAs have a "use-it-or-lose-it" rule: money not spent within the plan year generally cannot be carried forward. In 2024, FSA plans can allow up to $50 of unused funds to roll over to the next year, but amounts over this limit are forfeited.

HSAs, by contrast, allow unused funds to roll over indefinitely. This means money you contribute but don't spend stays in your account year after year. Additionally, you can earn interest or investment returns on HSA balances, while FSA funds typically sit in a non-interest-bearing account. HSAs are portable—you keep the account and its funds even if you change jobs or employers—while FSAs are tied to your employer's plan and generally end when you leave the job.

Dependent Care Accounts (also called Dependent Care FSAs) are another pre-tax benefit, but they specifically cover childcare and elder care expenses, not medical expenses. These accounts also follow use-it-or-lose-it rules and serve a different purpose than HSAs.

Health Reimbursement Arrangements, known as HRAs, represent another option that some employers offer. These employer-funded accounts can reimburse medical expenses