What is a health savings account (HSA)?

Just as the name implies, a health savings account (HSA) is a financial account designed to help you save for qualified health care expenses. Not just anyone can open an HSA. You must be enrolled in a high deductible health plan (HDHP). And not just any HDHP is HSA qualified. As defined by the Internal Revenue Service, the plan must have a higher deductible than typical individual health insurance benefits plans and a maximum out-of-pocket limit, including deductibles, copays and coinsurance.

HSA contribution limits

2024 HSA contribution limits

• An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,600) can contribute up to $4,150 — up $300 from 2023 — for the year. The maximum out-of-pocket is capped at $8,050.
• An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $3,200) can contribute up to $8,300 — up $550 from 2023 — for the year. The maximum out-of-pocket is capped at $16,100.

Catch-up contribution

When you turn 55, you can contribute an extra $1,000 each year to your HSA. It’s called a catch-up contribution. If you and your spouse are both over the age of 55, you can each contribute $1,000. Your spouse will just need to open their own HSA for their portion.

How does an HSA work?

After you enroll in a high deductible health plan and set up your HSA, you can begin contributing to the account. Advantages to an HSA:

• You own the account, not your employer. You can make deposits like you do with other personal bank accounts. Your employer might add money too.
• The money you contribute is tax-deductible. When you make contributions, your taxable income is reduced.
• You can invest your funds, and the interest or income is tax-free. The money can sit in your account and potentially grow over time, all of it tax-free.
• There’s no “use-it-or-lose it” policy. Since you own the account, the funds roll over year to year and the money stays with you — regardless if you leave your job or retire.
• If you’re under 65 and use the dollars for qualified medical expenses, you can withdraw the money tax-free.
• If you’re over 65, there are no stipulations on how you can use the money. You can continue to withdraw the money tax-free for medical expenses. Or you can use it for non-medical expenses, just pay your regular income tax. Some people even view their HSA as an added retirement account.

If you cash out the money before you’re 65 (and don’t use the money for qualified medical expenses), you’ll have to pay taxes on the amount, and you could be hit with a hefty 20% tax penalty.

HSA eligible expenses

The IRS determines the list of qualified medical expenses (Section 213(d) of the Internal Revenue Code). See the IRS List

Understanding HSA rules and benefits

To help make the most of your employer-sponsored benefit, understand the rules. For instance, an HSA is your money, you never lose it and it could add to your retirement. Many financial experts may advise on utilizing an HSA if you have the opportunity. When considering other options, do the math for your family to figure out what makes sense for your situation. If you still have questions, talk to your company’s Human Resources representative.

Compare HSAs to other health accounts

HSAs are different from Health Reimbursement Accounts (HRA) and Flexible Spending Accounts (FSA). Comparing the different types of accounts may help you understand better how to use these accounts to your benefit.