What a health spending account is and how you use it

A health spending account (HSA) is a tax-advantaged savings account you can use to pay for medical expenses that your regular health insurance does not cover. You put pre-tax money into the account, spend it on may be able to access health costs, and do not pay income tax on that money or the interest it earns. The account belongs to you — if you change jobs or leave your employer, the money stays yours.

The money works like a debit card. You fund the account through payroll deductions (your employer takes it out before taxes), then use a debit card or submit receipts to withdraw money for medical bills. Common may be able to access expenses include copays, deductibles, prescription drugs, dental work, vision care, and medical equipment like crutches or hearing aids.

Not every health plan qualifies. Your insurance must be a high-deductible health plan (HDHP) — meaning your deductible is at least $1,600 for individual coverage or $3,200 for family coverage in 2024. If your plan does not meet that threshold, you cannot open an HSA, even if your employer offers one.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan with a deductible of at least $1,600 (individual) or $3,200 (family) in 2024.
  • Money you put into an HSA is not taxed when you earn it, when you spend it on medical costs, or when it sits in the account earning interest.
  • The account is yours to keep even if you change jobs, and unused money rolls over to the next year with no expiration date.
  • You can withdraw money for any medical expense your insurance does not cover, including copays, deductibles, prescriptions, dental, and vision care.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax on it plus a 20 percent penalty; after 65, you pay only income tax.

How much you can contribute and who can open one

The IRS sets annual contribution limits. For 2024, you can put up to $4,150 into an individual HSA or $8,300 into a family HSA. These limits change each year. If you are 55 or older, you can contribute an extra $1,000 per year (called a catch-up contribution).

You must meet three conditions to open an HSA: you are enrolled in an HDHP, you have no other health insurance that is not a high-deductible plan, and you are not claimed as a dependent on someone else's tax return. If you have Medicare, you cannot contribute to an HSA, though you can keep one open and withdraw money from it.

Your employer may contribute money to your HSA as part of your benefits package. That money counts toward your annual limit but does not reduce the amount you can contribute yourself. For example, if your employer puts in $1,000 and you want to reach the $4,150 individual limit, you can contribute $3,150 more.

Tax advantages and how they work

An HSA gives you three tax breaks. First, money you contribute through payroll deductions is not subject to federal income tax or Social Security tax. Second, any interest or investment gains the account earns are not taxed. Third, withdrawals for may be able to access medical expenses are not taxed.

This is different from a flexible spending account (FSA), which your employer may also offer. An FSA has the same tax advantages but money does not roll over — you lose what you do not spend by the end of the year (with a limited carryover option in some plans). An HSA has no expiration, so unused money accumulates year after year.

You do not have to spend the money in the year you contribute it. If you put $4,150 in and spend only $2,000 on medical bills, the remaining $2,150 stays in the account earning interest, and you can use it next year or ten years from now.

What expenses you can and cannot pay for

may be able to access expenses are medical costs your insurance does not cover or only partially covers. You can use HSA money for copays, coinsurance, deductibles, prescription medications, dental work (fillings, root canals, orthodontics), vision care (glasses, contacts, eye exams), hearing aids, mental health counseling, physical therapy, and medical equipment prescribed by a doctor (walkers, wheelchairs, blood pressure monitors).

You cannot use HSA money for health insurance premiums (with three exceptions: COBRA continuation coverage, Medicare premiums if you are 65 or older, and long-term care insurance). You also cannot pay for cosmetic procedures, over-the-counter medications without a prescription, gym memberships, or vitamins unless a doctor prescribes them for a specific medical condition.

The IRS publishes a full list of may be able to access expenses, and it changes occasionally. If you are unsure whether a specific cost qualifies, ask your HSA provider or check the IRS website before you withdraw money. If you withdraw money for an ineligible expense, you owe income tax on it plus a 20 percent penalty.

How to access your money and track spending

Most HSA providers give you a debit card linked to your account. You swipe it at the pharmacy, doctor's office, or hospital just like a regular debit card. The money comes directly from your HSA balance. Some providers also let you set up automatic transfers to your checking account or reimburse yourself for out-of-pocket costs.

You can also request a check or bank transfer from your HSA provider. Some people pay medical bills out of pocket and then submit receipts to their HSA provider for reimbursement. This method lets the money in your account keep earning interest longer before you withdraw it.

Your HSA provider sends you a statement each month or quarter showing your balance, contributions, withdrawals, and interest earned. Keep receipts for all medical expenses you pay with HSA money. The IRS does not require you to submit receipts when you withdraw, but you must keep them for your records in case of an audit.

What happens to your HSA when you change jobs or retire

Your HSA is portable — it does not belong to your employer, it belongs to you. When you leave a job, the money stays in your account. You can keep the account open and continue using it, or roll it over to a new HSA at a different provider. You do not have to open a new HSA with your next employer unless you want to.

If your new employer offers an HSA, you can keep your old one open and contribute to both (as long as your total contributions do not exceed the annual limit). Some people close their old HSA and roll the balance into a new one to simplify record-keeping, but there is no requirement to do so.

After age 65, you can withdraw money from your HSA for any reason without penalty. If you withdraw for non-medical expenses, you pay income tax on the withdrawal but not the 20 percent penalty. This makes an HSA useful as a retirement savings tool — you can let the money grow tax-free for decades and then use it for medical expenses in retirement, or use it for other costs once you turn 65.

Common mistakes and how to avoid them

The most common mistake is withdrawing money for an ineligible expense. Over-the-counter pain relievers, cold medicine, and allergy medication are not covered unless a doctor writes a prescription. Sunscreen, toothpaste, and vitamins are also not covered unless prescribed for a medical condition. If you make this mistake, you owe taxes and a penalty on the withdrawal.

Another mistake is opening an HSA when you are not may be able to access. If you have other health insurance besides your HDHP, or if you are claimed as a dependent, you cannot contribute to an HSA. If you contribute anyway, the IRS will charge you a 6 percent penalty tax on the excess contribution each year until you correct it.

A third mistake is not keeping receipts. While the IRS does not require you to submit receipts when you withdraw, you must have them if audited. If you cannot prove an expense was medical, the IRS will treat the withdrawal as taxable income plus penalty.

Frequently Asked Questions

Can I use my HSA to pay for my spouse's medical expenses?

Yes, if your spouse is covered under your family HSA plan. You can use the account to pay for medical expenses for you, your spouse, and any dependents on your tax return, even if they are not on your health insurance. The money does not have to be used only for the person whose name is on the account.

What happens to my HSA if I lose my job?

Your HSA stays with you. The money is yours and does not disappear. You can keep using the account to pay for medical expenses, and you can continue to withdraw money. If your new job offers an HSA, you can roll your old balance into the new account or keep both open. You can only contribute to an HSA if you are enrolled in an HDHP, so if your new job does not offer one, you cannot add new money but you can still spend what you have saved.

Can I invest the money in my HSA?

Many HSA providers let you invest your balance in mutual funds, stocks, or bonds, similar to a 401(k). The money grows tax-free, and you pay no tax when you withdraw it for medical expenses. Not all providers offer investment options, so check with your HSA provider. If you invest and the market drops, your balance could decrease, so this option is best for money you do not plan to spend soon.

What is the difference between an HSA and an FSA?

Both let you use pre-tax money for medical expenses, but FSA money does not roll over — you lose what you do not spend by the end of the year (though some plans allow a small carryover). HSA money rolls over forever with no expiration date. You can only open an HSA if you have a high-deductible health plan; FSAs are available with any health plan. HSAs are portable when you change jobs; FSAs are tied to your employer.

Can I withdraw money from my HSA for a family member who is not on my tax return?

No. You can only use HSA money for medical expenses of you, your spouse, and people you claim as dependents on your tax return. If a family member is not your dependent, you cannot pay their medical bills with your HSA without owing taxes and a penalty on the withdrawal.