HSA 101: The Ins and Outs of Health Savings Accounts

Medical professional with a laptop and calculator

What is an HSA, and can it save me money?

What’s an HSA?

A health savings account is a type of bank account used specifically for medical costs – doctor visits, prescriptions, eyeglasses, and similar products and services. For an HSA you have through your employer, you choose how much money from your paycheck goes into this account each pay period before taxes are taken out. You can also deposit additional money to an HSA outside of your work contributions.

This pretax money stays in your account until needed for eligible out-of-pocket medical expenses. Your HSA money is yours to keep, rolling over from year to year and going with you if you leave your job.


High-deductible health plans (HDHPs) and HSAs

You can only have an HSA if you’re enrolled in a high-deductible health plan (HDHP) – a health insurance plan that features a lower monthly premium with the trade-off of a higher deductible.

HDHP thresholds change every year. For 2024, these plans must:

  • Have annual deductibles of at least $1,600 for single coverage and $3,200 for family coverage.
  • Have an annual out-of-pocket maximum of no more than $8,050 for single coverage and $16,100 for family coverage.

Usually, these plans will have “HDHP,” “high-deductible health plan” or “HSA” in their name. If your plan doesn’t, and it doesn’t meet HDHP requirements, then you won’t be able to open or participate in an HSA. You also won’t be eligible to open an HSA if you’re enrolled in Medicare or have any other health care coverage. If you have questions about whether you’re eligible for an HSA or not, your employer or health insurance company will have answers.

How does an HSA work?

Think of an HSA as a checking account that’s exclusively for health care expenses. If you qualify, it’s easy to open one up and use your HSA funds, either through a separate debit card or by submitting receipts for reimbursement.

Your HSA can serve as an excellent way to track and manage your health care costs, giving you a clear look into where your health care dollars go over time and where you can adjust get the most from your money.

How do I know if I am eligible for an HSA?

To be eligible for an HSA you must:

  • Be covered under a high-deductible health plan.
  • Not be covered under an ineligible plan like a non-HDHP, Medicare or a general- purpose flexible spending accounts (FSAs). Plans like dental and vision plans, along with accident and disability insurance are okay and do not affect your eligibility.
  • Not be claimed as a dependent on someone else’s tax return.

Setting up your HSA

If you’re enrolling in a high-deductible health plan through work, your employer may set up an HSA for you or refer you to a financial institution that can. If your employer sets up an HSA for you, you’ll enjoy a pretty seamless experience since your HSA’s bank or credit union will link with your payroll system, making pretax deductions from your paycheck automatic.

If you’re enrolling in a high-deductible health plan on your own, your new insurer might also be able to set up an HSA for you. If they can’t, or you want to open your account elsewhere, you can set up your HSA at any bank or credit union that offers one. Keep in mind that HSA features may differ from place to place – always ask for a list of benefits and fees your HSA may have so you get a full viewpoint of what to expect.

Adding money to your HSA

As part of setting up an HSA through your employer, you’ll be asked how much money you’ll want to set aside for your HSA. Each pay period, this amount will be sent directly to your HSA before taxes are taken out of your paycheck. Your employer might also contribute money to your HSA or match your contributions.

You can also deposit your own after-tax money to your HSA, either all at once or through regular automatic deposits. Even better, these deposits are deductible when you file your taxes every year.

However, whether you contribute via payroll deductions or deposits you make yourself, there are restrictions to the amount of money that can be put into an HSA each year.


HSAs have limits on how much money you can contribute

The IRS has annual limits for how much can be contributed to HSAs. These limits can change each year.

 In 2024, HSA contribution limits are:

  • $4,150 for individual coverage
  • $8,300 for family coverage

If you’re 55 or older, you can also make an extra $1,000 “catch up” contribution each year. These limits include money from all sources – like you and your employer – and across all your HSAs (if you happen to have multiple accounts). For more details, check out irs.gov.

How much should I contribute to my HSA?

It depends on how much you spend on health care each year and how you see your needs changing in the future. Before you decide, take some time to look back at how much you’ve spent on medical expenses in past years – this can help you get an assessment of what you’ll spend in the coming year. Try to figure in any money you’ve spent on dental and vision care since you can use money from your HSA for these, too.

It can also help to look forward. For example, if you know you’re expecting a baby or planning for a major surgery- events like these can also factor into what you might want to save in your HSA.

Remember, HSA funds don’t terminate – they stay with you until you spend them. You can set aside as much as your budget allows (if you stay under the IRS limits).

Is an HSA pretax?

Definitely – in fact, the tax savings are triple!

  1. First, you’re not taxed on money that goes into your HSA.
  2. Second, HSA interest and investment earnings are tax free.
  3. And third, when you spend your HSA on eligible expenses, you’re not charged tax.

It all means lower taxable income, tax-free earnings and tax-free health care spending. You can even save your HSA funds all the way to retirement – and pay for health care expenses later in life.

Can my spouse and I both contribute to an HSA?

Yes, if you’re both covered by an HDHP and not enrolled in an ineligible plan (non-HDHP medical plan, Medicare or a general-purpose FSA). However, your combined contributions can’t be more than the annual family limit.

What can I use my HSA for?

In general, you can use your HSA for a wide variety of health care expenses, like doctor visits, lab fees, prescription medicines, home medical equipment and more. You can also use HSA funds for dental and vision care. Dentist office visits and braces are eligible too, as well as eye exams and LASIK surgery.

Spending your HSA funds – debit cards and reimbursement

There are two main ways you can access the money in your HSA account: debit card and reimbursement.

HSA debit card

Your HSA may come with a special debit card. This is the easiest way to use your HSA – just present the debit card at your provider’s office when paying for services, or use it to pay for eligible items at a store or online. The card takes the money directly from the account. Just save the receipt in case you’re asked to verify that the transaction was for eligible items or services.

HSA debit cards also provide another money-saving convenience: Most will only work at HSA-eligible retailers, declining transactions elsewhere. That makes an excellent safeguard against accidentally buying ineligible items and services – a mistake that can carry a sizable IRS penalty of 20%.

Getting reimbursed from your HSA

Another way you can access your HSA funds is through reimbursement, which takes a few extra steps but can act as a good backup in case you forget, can’t use or don’t have an HSA debit card.

Just pay for your HSA eligible expenses as you normally would and save the receipt. Then, submit your receipt along with the necessary details to your HSA’s bank – some will let you submit photos of your receipts through their website or mobile app.

Reimbursement funds are sent directly to your bank account if you’ve signed up for direct deposit, or by check. Some HSAs may charge fees for check reimbursements.

Keeping track of your HSA

Most banks give you access to your HSA through either an online account or mobile app. This way, you can keep track of deposits and withdrawals in real time while also seeing where your money is going. In any case, your HSA administrator will also send you IRS Form 5498-SA every spring, which is a summary of your HSA activity for the previous year. When you receive it, double check to make sure all the information is accurate and save it for your records.

Your HSA is always yours

As time goes on, one of the best parts about having an HSA is that the money you deposit remains yours until you use it:

HSA funds roll over year to year (they don’t expire)

There’s no limit to the amount of funds you can roll over from year to year. Plus, unlike a flexible spending account (FSA), there’s no “use it or lose it” rule.

Bring your HSA with you

Leaving your current job? Your HSA travels with you, along with all your funds. If your next employer has an HDHP, you can open a new HSA and transfer your funds over without penalty. But if you don’t end up covered by an HDHP after you leave your current job, you can still use your HSA funds for eligible expenses – you just can’t contribute more money to your account.

Earning interest with your HSA

HSAs can earn interest just like other interest-bearing bank accounts. Plus, the interest you earn is tax free. If you can’t find your account’s interest rate, your HSA administrator can give you the specifics.

Investing your HSA funds

Once you’re over a minimum account balance, some HSAs will allow you to transfer part of your funds into a separate account to invest. If offered, your HSA administrator will have more details about HSA investment options.

HSA funds after age 65

When you celebrate your 65th birthday, your HSA becomes even more flexible. After age 65, the 20% IRS penalty no longer applies to using HSA funds for non-medical expenses (you’ll still pay regular tax on these withdrawals). In effect, this turns your HSA into a traditional IRA – which is why some people use their HSAs as an additional way to save for retirement.