Yes, HSA stands for Health Savings Account, which is a type of medical savings account

An HSA (Health Savings Account) is a medical savings account—but not all medical savings accounts are HSAs. The term "medical savings account" is broader and can refer to several different account types. An HSA is the most common one available today, but it has specific rules about who can open one, how much you can deposit, and what you can spend the money on.

The key difference is that an HSA is tied to a high-deductible health plan (HDHP). You cannot open an HSA unless you are enrolled in an HDHP. The account lets you set aside pre-tax money to pay for medical expenses now or in the future. Money you do not spend stays in the account and grows tax-free, which makes it different from a flexible spending account (FSA), where unspent money is typically forfeited at the end of the year.

Key Takeaways

  • An HSA is a medical savings account that requires enrollment in a high-deductible health plan; you cannot have one without the other.
  • HSA contributions are made with pre-tax money, reducing your taxable income for the year you contribute.
  • Money in an HSA rolls over year to year and can be invested to grow, unlike FSA funds which are usually lost if unspent.
  • You can withdraw HSA money tax-free only for may have access to medical expenses; non-medical withdrawals are taxed as income plus a penalty.
  • Annual contribution limits vary by year and whether you have individual or family coverage; check the current limits with your plan or the IRS.

How an HSA differs from other medical savings accounts

Before HSAs became common, there were other medical savings accounts, including Archer MSAs (Medical Savings Accounts), which are now rarely used. The main difference between an HSA and an older MSA is that HSAs have higher contribution limits and fewer restrictions on who can open one. An Archer MSA required you to be self-employed or work for a small employer, whereas HSAs are open to anyone enrolled in an HDHP.

An FSA (Flexible Spending Account) is also a medical savings account, but it works differently. With an FSA, you contribute pre-tax money and use it to pay for medical expenses during the plan year. However, FSAs have a "use-it-or-lose-it" rule: money left in the account at the end of the year is forfeited. Some plans allow a small carryover (up to $610 in 2024, though this varies), but most do not. An HSA has no such deadline—your money stays there indefinitely.

A Dependent Care FSA is another type of medical savings account, but it is only for childcare and adult dependent care expenses, not general medical costs. It also follows the use-it-or-lose-it rule.

What you can and cannot spend HSA money on

HSA money can be used for may have access to medical expenses, which include doctor visits, prescription medications, dental work, vision care, mental health treatment, and medical equipment like crutches or blood pressure monitors. You can also use HSA funds to pay deductibles, copays, and coinsurance on your health plan. The IRS publishes a detailed list of what counts as a may have access to expense.

You cannot use HSA money for health insurance premiums (with a few exceptions: COBRA, Medicare, or long-term care insurance premiums are allowed). You also cannot use it for cosmetic procedures, over-the-counter medications (unless prescribed by a doctor), or gym memberships, even if they are marketed as health-related.

If you withdraw money from your HSA for a non-may have access to expense before age 65, you pay income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, but you still pay income tax on non-medical withdrawals. This makes an HSA function somewhat like a retirement account after 65.

How HSA contributions and limits work

You contribute to an HSA with pre-tax money, which lowers your taxable income for that year. If you contribute $3,000 and earn $50,000, your taxable income is reduced to $47,000. This tax savings is one of the main reasons people use HSAs.

The IRS sets annual contribution limits, which change each year. The limits depend on whether you have individual coverage or family coverage under your HDHP. For 2024, the individual limit is $4,150 and the family limit is $8,300, but these numbers change annually. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. You can only contribute to an HSA during the months you are enrolled in an HDHP.

You can contribute through payroll deductions (which is the most common way), or you can contribute directly to the account yourself. If you contribute through payroll, the money is deducted before taxes. If you contribute yourself, you deduct the contribution on your tax return.

What happens to HSA money if you change health plans

Your HSA belongs to you, not to your employer or your health plan. If you leave your job or switch to a different health plan, the money in your HSA stays with you. You can keep the account open and continue to use it for may have access to medical expenses, even if you no longer have an HDHP.

However, you can only make new contributions to an HSA while you are enrolled in an HDHP. Once you switch to a different type of plan (like a PPO or HMO), you stop being able to contribute new money. But the money already in the account remains yours and can be spent on medical expenses at any time.

If you move to Medicare, you can no longer contribute to an HSA, but you can still withdraw money from it for may have access to medical expenses. After age 65, you can also withdraw money for non-medical reasons without the 20% penalty (though you still pay income tax).

HSA investment options and growth

Many HSAs allow you to invest the money in mutual funds, stocks, or other investments, similar to a retirement account. This means your HSA balance can grow over time through both contributions and investment returns. Some HSAs have a minimum balance before you can invest (for example, $1,000 or $2,000), and the rest must stay in a cash account earning little or no interest.

Investment options vary by HSA provider. Some offer a limited menu of funds; others offer more choices. If you plan to use your HSA as a long-term savings vehicle rather than spending it immediately, comparing investment options between providers can matter. A provider with low fees and good fund choices will help your money grow faster than one with high fees and limited options.

Keep in mind that investment returns are not may provide, and your HSA balance can go down as well as up. However, the tax-free growth on may have access to medical expenses makes HSAs attractive for people who can afford to save and not touch the money for several years.

Frequently Asked Questions

Can I have an HSA without a high-deductible health plan?

No. An HSA requires enrollment in an HDHP. If you switch to a different type of health plan, you can no longer contribute new money to your HSA, though you can keep the account and spend what is already in it on medical expenses.

What is the difference between an HSA and an FSA?

An HSA has no use-it-or-lose-it rule and money rolls over year to year. An FSA requires you to spend the money within the plan year or lose it (though some plans allow a small carryover). HSAs also require an HDHP; FSAs do not.

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

Yes, you can use HSA money for may have access to medical expenses of your spouse and dependents, even if they are not covered under your health plan. The expense must be may have access to; the person does not have to be on your plan.

What happens to my HSA if I do not use the money?

The money stays in your account indefinitely. Unlike an FSA, there is no deadline to spend it. You can let it grow through contributions and investments, and use it later in life for medical expenses or, after age 65, for any reason.

Do I have to report my HSA on my taxes?

Yes. You report contributions and withdrawals on your tax return. If you contribute through payroll, your employer reports this. If you contribute yourself, you deduct the contribution on Form 8889. Withdrawals for may have access to medical expenses are not taxed, but non-may have access to withdrawals must be reported as income.