How Health Savings Accounts Work: The Three-Part System

How an HSA actually works

A Health Savings Account is a bank account paired with a high-deductible health insurance plan. You put pre-tax money into the account, use it to pay medical bills, and any balance you don't spend rolls over to next year — forever. The money grows tax-free, and withdrawals for medical expenses are never taxed. That's the core mechanic: a tax shelter specifically for health costs.

The account itself lives at a bank, credit union, or investment firm you choose. Your employer can deposit money there, you can deposit money there, or both. When you have a medical bill, you pay it from the HSA account the same way you'd pay from a checking account — by debit card, check, or transfer. The IRS doesn't require you to submit receipts to the account holder, but you do need to keep them for your own records in case of an audit.

The tax benefit works three ways: money going in is not taxed as income, money growing inside is not taxed, and money coming out for medical bills is not taxed. That's why it's called a triple tax advantage. If you withdraw money for something that isn't a medical expense, you pay income tax on it plus a 20 percent penalty — but only on the amount you withdraw for non-medical use, not the whole account.

Key Takeaways

• You must be enrolled in a high-deductible health plan to open or contribute to an HSA, and you cannot be claimed as a dependent on someone else's tax return.
• Money you contribute reduces your taxable income, money inside grows tax-free, and money spent on medical bills comes out tax-free.
• You own the account and the money in it — if you change jobs or insurance plans, the account stays with you and the balance never expires.
• You can invest HSA money in stocks, bonds, and mutual funds instead of leaving it in cash, which lets it grow faster over time.
• Receipts and records are your responsibility; the IRS doesn't require you to submit them to your bank, but you must have them if audited.

The three requirements to open and fund an HSA

First, you must be enrolled in a high-deductible health plan (HDHP). The IRS sets the minimum deductible each year — for 2024, that's $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum that doesn't exceed $8,050 for individual coverage or $16,100 for family coverage. If your plan's deductible is lower than the IRS minimum, you cannot open an HSA that year, even if your employer offers one.

Second, you cannot be claimed as a dependent on someone else's tax return. This disqualifies most full-time students and adult children living with parents who claim them. You also cannot be enrolled in Medicare, and you cannot have other health coverage besides the HDHP — with limited exceptions for accident, disability, dental, vision, and long-term care insurance.

Third, you must be a U.S. citizen or resident alien with a valid Social Security number. Once you meet all three conditions, you can open an HSA at any bank or financial institution that offers them. You don't have to use your employer's plan; you can shop for an account elsewhere and move money between providers later.

How much you can contribute each year

The IRS sets annual contribution limits that change each year. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you're 55 or older, you can add an extra $1,000 per year — called a catch-up contribution — until you turn 65 and enroll in Medicare.

Your employer can contribute to your HSA, and that money counts toward your limit. If your employer puts in $2,000 and you put in $2,000, you've hit the $4,150 individual limit and cannot contribute more that year. Money from your employer is not taxed as income to you, and your own contributions reduce your taxable income on your tax return.

If you change health plans mid-year — for example, you lose your HDHP coverage in June — you can only contribute a prorated amount for the months you were covered. The IRS has a special rule called the "last-month rule" that lets you contribute the full year's amount if you're covered on December 1, but this creates a tax trap: if you don't stay covered through the following December 31, you owe taxes and penalties on the excess. Most people avoid this rule unless they're certain they'll stay covered.

What counts as a medical expense you can pay from the account

The IRS publishes a detailed list, but the basic rule is: any cost related to diagnosing, treating, or preventing illness or injury counts. This includes doctor visits, hospital stays, prescription drugs, dental work, vision care, mental health therapy, and physical therapy. It also includes medical equipment like wheelchairs, crutches, and hearing aids; over-the-counter medicines like aspirin and allergy pills; and even some costs insurance won't cover, like acupuncture or chiropractic care if your plan doesn't pay for them.

Cosmetic procedures don't count unless they're medically necessary — for example, reconstructive surgery after an accident or injury. Gym memberships and general wellness programs don't count, but some specific fitness programs prescribed by a doctor do. Vitamins and supplements don't count unless they're prescribed by a doctor for a specific medical condition.

You can also pay for your health insurance premiums from an HSA, but only certain ones: COBRA premiums (if you lose employer coverage), premiums while you're receiving unemployment benefits, and long-term care insurance premiums up to an IRS limit. You cannot pay regular monthly premiums for your current employer health plan from the HSA.

How the money grows and what happens to it

If you don't spend your HSA balance in a given year, it stays in the account and rolls over to the next year. There is no "use it or lose it" deadline like there is with flexible spending accounts. The money is yours to keep, and it can sit there for decades if you don't need it.

Most HSA accounts start as cash accounts, earning little to no interest. But many providers let you invest the balance in mutual funds, stocks, or bonds — the same way you'd invest in a brokerage account. If you invest the money, it can grow faster, but it also carries investment risk. Some people keep a small cash cushion for immediate medical bills and invest the rest for long-term growth.

When you turn 65 and enroll in Medicare, you can no longer contribute to the HSA, but you can still withdraw money from it for medical expenses. After 65, if you withdraw money for something that isn't a medical expense, you only pay income tax on it — the 20 percent penalty goes away. This makes an HSA a powerful retirement savings tool: you can let it grow for decades, and after 65 it works like a traditional IRA for non-medical withdrawals.

How to actually use the money when you have a medical bill

Most HSA providers issue a debit card linked to the account. When you get a medical bill, you can swipe the card at the provider's office, pharmacy, or hospital just like a regular debit card. The money comes straight out of your HSA balance. Some providers also let you write checks or transfer money electronically.

For bills you've already paid out of pocket, you can request a reimbursement from your HSA. You submit a claim form (usually online) with a copy of the receipt or bill, and the provider transfers the money back to your checking account. This process typically takes a few business days. You don't have to reimburse yourself immediately — you can pay a bill today and request reimbursement years later, as long as you keep the receipt.

If you're not sure whether a specific cost counts as a medical expense, ask your HSA provider before you pay. They can tell you whether the IRS allows it. Paying for something that doesn't count means you'll owe income tax plus a 20 percent penalty on that withdrawal, so it's worth checking first.

What happens to your HSA if you change jobs or insurance

The HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays in it. You can keep using it to pay medical bills, and you can keep contributing to it if your new job offers an HDHP. If your new job doesn't offer an HDHP, you can still withdraw money from the HSA for medical expenses, but you cannot contribute new money until you're covered by an HDHP again.

If you switch from one HDHP to another — whether through a new employer or by buying a plan on your own — your HSA moves with you. You can keep the same account at the same bank, or you can roll the money to a new HSA at a different provider. A rollover works like a 401(k) rollover: the money transfers directly from one account to another, and you don't pay taxes or penalties as long as it happens within 60 days.

If you lose HDHP coverage and switch to a regular health plan, you can no longer contribute to the HSA, but the money already in it stays yours. You can withdraw it for medical expenses anytime, with no time limit. The account never expires, and there's no deadline to use the money.

Frequently Asked Questions

Can I use my HSA to pay for my spouse's or child's medical bills?

Yes, as long as they are your dependent for tax purposes. You can pay for their doctor visits, prescriptions, dental work, and other medical expenses from your HSA. You cannot pay for a spouse's or adult child's bills if they file their own tax return or are claimed as a dependent by someone else.

What happens if I withdraw money from my HSA for something that isn't medical?

You pay income tax on the amount you withdraw plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical expense and you're in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalties — $420 total. After age 65, the penalty goes away, but you still owe income tax.

Can I have more than one HSA at the same time?

You can have accounts at multiple banks, but your total contributions across all accounts cannot exceed the annual limit. If you have two HSAs and contribute $2,000 to each, you've exceeded the $4,150 individual limit and must withdraw the excess before tax time or face penalties. Most people keep one account and move it if they switch providers.

Do I have to report my HSA on my tax return?

Yes. You report contributions you made yourself on Form 8889, which you file with your 1040. Your employer's contributions are reported on your W-2 and don't go on Form 8889. If you made any non-medical withdrawals, you report those on Form 8889 as well. The IRS matches HSA reports from your bank to your tax return, so accuracy matters.

Can I use my HSA to pay for health insurance premiums?

Only certain premiums: COBRA coverage if you lost employer insurance, premiums while you're receiving unemployment benefits, and long-term care insurance up to an IRS limit. You cannot use it for your current employer's health plan premiums or for individual market premiums while you're working. After age 65, you can use it for Medicare premiums and supplemental insurance.