What Is a Health Savings Account (HSA)?

What is a Health Savings Account?

A Health Savings Account (HSA) is a personal savings account designed to help people set aside money for healthcare expenses while receiving valuable tax advantages.

Unlike a Flexible Spending Account (FSA), an HSA belongs to the account holder—not the employer. If you change jobs or retire, you generally keep the account and any money it contains.

HSAs were created to help people enrolled in qualifying High Deductible Health Plans manage out-of-pocket healthcare costs while encouraging long-term healthcare savings.

How does an HSA work?

An HSA works alongside an HSA-eligible High Deductible Health Plan.

Money may be contributed by:

• You
• Your employer
• Another person on your behalf

Contributions are subject to annual IRS limits.

Funds can then be used to pay for qualified medical expenses such as:

• Deductibles
• Copayments
• Coinsurance
• Prescription medications
• Medical equipment
• Dental care
• Vision care

If the expense qualifies under IRS rules, withdrawals are generally tax-free.

Unused funds remain in the account and continue rolling over from year to year.

Who is eligible for an HSA?

To contribute to an HSA, you generally must:

• Be covered by an HSA-eligible High Deductible Health Plan (HDHP).
• Have no other disqualifying health coverage.
• Not be enrolled in Medicare.
• Not be claimed as another person's dependent for tax purposes.

Eligibility requirements are established by federal law and administered by the IRS.

What are the tax advantages of an HSA?

HSAs are well known because they offer three potential federal tax advantages.

1. Eligible contributions may be tax-deductible or made pre-tax through payroll.
2. Earnings in the account generally grow tax-free.
3. Withdrawals for qualified medical expenses are generally tax-free.

Because of these combined tax benefits, HSAs are often used both for current healthcare expenses and long-term medical savings.

State tax treatment may differ.

What expenses can an HSA pay for?

Qualified medical expenses are defined by the Internal Revenue Service.

Examples include:

• Doctor visits
• Hospital care
• Prescription medications
• Mental health services
• Dental treatment
• Vision exams and eyeglasses
• Hearing aids
• Laboratory services
• Medical equipment

IRS Publication 502 provides a comprehensive list of qualified medical expenses.

HSA vs. FSA

Although both accounts help pay medical expenses, they work differently.

Health Savings Account (HSA)

• Requires an eligible High Deductible Health Plan.
• Owned by the individual.
• Funds generally roll over indefinitely.
• Remains with you if you change employers.

Flexible Spending Account (FSA)

• Offered through an employer.
• Generally subject to annual use-it-or-lose-it rules, although employers may offer limited carryovers or grace periods.
• Usually does not transfer when employment ends.

HSA vs. Health Reimbursement Arrangement (HRA)

An HSA and an HRA are also different.

HSA

• Employee-owned account.
• Individual controls the funds.
• Contributions may come from both the employee and employer.

HRA

• Employer-owned reimbursement arrangement.
• Employer determines reimbursement rules.
• Funds generally do not belong to the employee after leaving employment.

What happens to an HSA when you retire?

The account remains yours.

After enrolling in Medicare, you generally can no longer make new HSA contributions, but you may continue using existing HSA funds for qualified medical expenses.

Depending on IRS rules, HSA funds may also be used for certain Medicare premiums and other qualified healthcare costs, such as your Medicare Part B premium.

Why this matters

Healthcare expenses often increase over time, especially as people age. An HSA provides a way to save for those costs while receiving significant tax advantages. Understanding how HSAs work—and who qualifies—can help individuals choose the right health insurance plan and prepare for future medical expenses.