Your Free Guide to HSA Shopping Options

What This Guide Covers About Health Savings Accounts

A Health Savings Account, or HSA, is a savings account designed to help people pay for medical costs. Unlike a regular savings account, an HSA offers special tax advantages that can make your healthcare dollars stretch further. This guide provides information about how HSAs work, what expenses you can use them for, and how shopping for HSA options works.

According to the Employee Benefit Research Institute, approximately 30 million Americans had HSA coverage in 2022, though many of those account holders don't fully understand their options. This guide walks through the key features and mechanics of HSAs so you can understand how they function and what choices exist when setting up or managing an account.

HSAs are connected to health insurance plans called High Deductible Health Plans, or HDHPs. These plans have higher deductibles than traditional insurance, meaning you pay more out-of-pocket before your insurance coverage kicks in. The tradeoff is that HSAs let you set aside pre-tax money to cover those costs. Understanding this relationship is the foundation for making informed decisions about HSA shopping.

The information in this guide reflects current IRS rules and regulations. However, tax laws and account regulations change periodically. This guide explains general concepts and common structures, but specific situations vary. You may want to review official IRS publications or speak with a tax professional about your particular circumstances.

Practical Takeaway: Before exploring specific HSA options, understand that an HSA is fundamentally a savings tool paired with a specific type of health insurance. The account itself works similarly across providers, but the insurance plan and bank offering the HSA are separate choices you'll make together.

How HSA Tax Advantages Work and Why They Matter

The primary reason people use HSAs is the tax treatment. Money you contribute to an HSA is not subject to federal income tax. Additionally, the earnings that accumulate in the account—such as interest or investment gains—are not taxed as long as you use the money for qualified medical expenses. This three-layer tax advantage (contributions, growth, and qualified withdrawals) is what makes HSAs financially powerful.

Here's a concrete example: If you contribute $4,150 to an HSA in 2024 and earn $200 in interest, neither the contribution nor the earnings are taxed if you use the money for medical costs. If you contributed that same amount to a regular savings account, you'd owe taxes on the $200 in interest. Over time, this tax-free growth compounds, especially if you don't withdraw the money immediately.

The IRS sets annual contribution limits. For 2024, individuals can contribute up to $4,150 per year, and families can contribute up to $8,300 per year. These limits are adjusted annually for inflation. If your employer contributes to your HSA, that contribution counts toward your annual limit. Some employers contribute substantial amounts—occasionally $1,000 or more—which reduces the amount you need to contribute from your own paycheck.

One important feature is that HSA funds roll over from year to year. Unlike some other tax-advantaged accounts, there's no "use it or lose it" provision. Money that sits unused in your HSA at the end of the year remains available for future medical expenses. This makes HSAs particularly useful for people who want to save for healthcare costs in retirement.

However, if you withdraw money for non-medical purposes before age 65, you'll owe income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, though you'll still owe income tax on non-medical withdrawals. This structure encourages using the account for its intended purpose while providing flexibility later in life.

Practical Takeaway: HSAs offer three tax advantages—contributions, growth, and qualified withdrawals are all tax-free. Understanding these benefits helps you see why HSAs might be worth choosing, even if the insurance plan they're paired with has a higher deductible than other options.

Identifying Qualified Medical Expenses You Can Pay With HSA Funds

HSAs can only be used for "qualified medical expenses" as defined by the IRS. Knowing what qualifies is essential because using HSA money for non-qualified expenses triggers taxes and penalties. The list of qualified expenses is broader than many people realize, covering not just major medical events but routine care and supplies.

Qualified expenses include health insurance premiums in certain situations, copayments, coinsurance, and deductibles for your medical plan. Doctor visits, prescription medications, dental work, and vision care are covered. Hospital stays, surgeries, and emergency room visits qualify. Mental health counseling, physical therapy, and chiropractic care also count. Additionally, over-the-counter items like pain relievers, allergy medicine, antacids, and first-aid supplies are qualified expenses as long as you have a prescription or doctor's recommendation.

Some less obvious expenses also qualify. Insulin and other diabetes supplies are covered. Hearing aids and hearing aid batteries are qualified expenses. Crutches, walkers, and other mobility aids qualify. Even costs like medical transportation to a healthcare facility can be paid from an HSA. Mileage to medical appointments can be deducted as a qualified expense using the IRS mileage rate.

Expenses that do not qualify include cosmetic surgery (unless it's reconstructive and medically necessary), over-the-counter medications without a prescription, gym memberships or general fitness expenses, and dental work purely for cosmetic reasons. Weight loss programs and diet foods are generally not qualified unless prescribed by a doctor for a specific medical condition. Long-term care insurance premiums have limits on what can be paid with HSA funds.

The IRS maintains a detailed list of qualified medical expenses in Publication 502. When you're unsure whether something qualifies, you can reference this publication or consult with a tax professional. Many HSA providers also maintain resources and lists to help account holders determine whether specific expenses are qualified.

Keeping records of your medical expenses is important. If you withdraw money from your HSA, you should maintain documentation showing the expense was qualified. You don't typically need to submit receipts when you make withdrawals, but having them on file protects you if you're ever audited and can help you track your healthcare spending.

Practical Takeaway: Before assuming an expense doesn't qualify, check the IRS list. Many healthcare costs you already incur—dental cleanings, prescription refills, vision exams—can be paid with HSA funds, which means you're using pre-tax money for something you'd pay anyway.

Finding and Comparing HSA Account Providers

Once you've chosen or been enrolled in a High Deductible Health Plan through your employer or the health insurance marketplace, you'll need to decide where to open your HSA. Your health insurance provider may offer an affiliated HSA account, but you typically have the option to open an account with a bank or financial institution of your choosing. This is an important decision because different providers offer different features, costs, and investment options.

HSA providers fall into several categories. Some are banks that offer HSAs as a deposit product. Others are insurance companies that administer HSAs. Still others are standalone HSA custodians or administrators that specialize in HSAs. Each type may offer different account structures. Some providers offer HSAs with just a debit card for paying qualified medical expenses. Others offer investment options where you can place funds in savings, money market accounts, or even investment funds.

Key features to compare across providers include account maintenance fees, debit card fees, withdrawal fees, and whether the provider charges to invest funds. Some HSA providers charge monthly maintenance fees ranging from $2 to $5, while others offer no monthly fees. If you invest HSA funds, some providers charge investment management fees. These fees may be small individually but add up over time, so comparing them matters if you plan to maintain your account long-term.

The investment options available vary significantly. Some HSA providers only offer savings accounts earning a modest interest rate. Others offer access to stocks, bonds, and mutual funds, allowing you to grow your account over time. If you're young and planning to use your HSA as a long-term savings vehicle for retirement healthcare costs, investment options become more valuable. If you're using your HSA to pay current medical expenses, a simple savings account may be sufficient.

Customer service and user interface also differ. Some providers offer online portals where you can easily view your balance, request reimbursements, and track spending. Others