What Is a Health Savings Account and How Does It Work?

HSAs are tax-advantaged accounts that you can use to pay for certain types of healthcare costs.

Updated November 29, 2022

Insurify partners with top insurance companies to provide a comprehensive comparison experience. However, the insurance experts writing our content operate independently of our partners. Check out reviews from over 3,000 satisfied customers, how we make money, our data methodology, and our editorial standards.

A health savings account — or HSA — is a tax-advantaged account that allows you to save pre-tax dollars for qualifying future medical expenses. You must be on a high-deductible health plan (HDHP) to be eligible to open an HSA.

HDHPs usually have lower monthly premiums than traditional health insurance plans but require you to pay more out of pocket before insurance funds kick in. Pairing an HSA with a high-deductible health plan could save you money each month to grow tax-free earnings over time.

What is a health savings account?

A health savings account is a type of savings account that allows you to stockpile pre-tax dollars for qualified medical expenses. You can use an HSA to save money on healthcare costs and as an investment vehicle.

Some employers offer HSAs with employer-sponsored health insurance plans. Otherwise, you can shop around at banks and other financial institutions for an account to fit your needs.

Important Information:

Not everyone is eligible to open an HSA. You must have a high-deductible health plan to contribute to an HSA. The IRS defines HDHPs as plans that feature deductibles of at least $1,400 for individuals and $2,800 for families.

How does a health savings account work?

With an HSA, employers take deposits out of your paycheck before deducting payroll taxes. If you’re not part of an employer-sponsored account, you can work with your employer’s benefits administrator to set up deposits.

Your employer may also contribute to the account if it’s a sponsored account. Family members and other individuals can contribute to your HSA, too. You can also contribute after-tax funds to your HSA and deduct it from your gross income on your annual tax return.

You also won’t pay income tax on withdrawals from the account as long as you use the funds to pay for eligible medical expenses. You can use funds to cover healthcare costs until you reach your healthcare plan’s deductible. Eligible expenses include copays and coinsurance, payments that you make until you reach your out-of-pocket limit. Other eligible expenses include medical procedures, prescription medication, dental care, vision care, medical equipment, and more. In some cases, you can also use HSA funds on medical expenses for a spouse or dependents.

HSA funds can also grow through investment. You can use your HSA balance to purchase stocks, bonds, mutual funds, and other investment types.

Keep in Mind:

Investing your HSA funds means they have the potential for growth. But investment is inherently risky, and you run the chance of losing money meant for medical expenses.

Money kept in an HSA never expires. If you have funds left over at the end of the year, they’ll roll over to the next year for use. Funds are also available whether you change employers, switch health insurance coverage, or retire. You can contribute to an HSA as long as you’re enrolled in a qualified high-deductible health plan and not under Medicare coverage.

If you take money from your HSA before age 65 and use it for non-qualifying expenses, you’ll have to pay federal income tax on the withdrawn amount, plus a 20% tax penalty. Once you reach age 65, you can withdraw HSA funds for any reason without penalty, but you’ll have to pay income tax on any amount you don’t use for qualifying expenses.

Who’s eligible for an HSA?

The IRS set the following eligibility guidelines for health savings accounts:

  • You’re on a qualifying high-deductible health plan.

  • You have no other health coverage.

  • You aren’t enrolled in Medicare.

  • You aren’t claimed as a dependent on someone else’s tax return.

If you open an HSA and later switch to a non-eligible healthcare plan or enroll in Medicare, you can still keep your HSA, but you can’t contribute additional funds to it.

How can you get a health savings account?

If your employer offers company-sponsored HSA, you can work with your employer or benefits manager to set up an HSA account and direct deposits. HSAs are also available through banks, credit unions, and other financial institutions. Check whether your health insurance provider partners with financial institutions to offer HSAs to members.

Opening an HSA account is similar to opening a bank account. The bank or financial institution will ask you to provide personal information to verify your identity and employment, such as your:

  • Full name

  • Physical address

  • Phone number

  • Email address

  • Driver’s license or other government-issued photo ID

  • Social Security number

  • Employer information

When researching HSA accounts, consider factors such as fees to open or maintain the account each month, minimum deposit requirements, online banking, debit card access, and other account features.

What are HSA contribution limits?

The IRS limits how much you can contribute to a health savings account each year. Limits vary based on whether you have self-only or family coverage under an HDHP. Here are the HSA annual contribution limits for 2022 and 2023:

Coverage Type2022 Limit2023 Limit
Self-only 55 and older$4,650$4,850
Family 55 and older$8,300$8,750

If you’re 55 and older, you can contribute an additional $1,000 annually to an HSA. 

Be careful not to exceed contribution limits in a year. Doing so has complex tax implications. Excess contributions aren’t tax-exempt, and you’ll likely have to pay a 6% excise tax on the excess contributions. You can sometimes withdraw all or a portion of the excess contributions and avoid the excise tax on the withdrawn amount.

Learn More: Medicare Premiums and Tax Deductions

What medical expenses can you pay with HSA money?

You can only use HSA funds tax-free for IRS-approved medical expenses. The IRS defines medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”

Common types of expenses approved for HSA funds include:

  • Medical exams and procedures

  • Medical equipment

  • Dental and vision care

  • Copays and coinsurance costs

  • Medical-related transportation and lodging expenses

The list of approved expenses also includes some less obvious medical costs, like capital expenses for special equipment installation, a guide dog or service animal, lead-based paint removal, and medical conferences.

The IRS also specifies the types of expenses that can’t be covered with HSA funds. The list includes costs that aren’t medically necessary or are cosmetic in nature, such as health or fitness club dues, babysitting costs, teeth whitening, and funeral expenses.

HSA-Covered Medical ExpensesNot Covered by HSA Funds
AmbulanceControlled substances
Birth controlCosmetic surgery
Contact lensesFuture medical care
Dental treatmentsHousehold help
Fertility enhancementMaternity clothes
Hospital servicesMost insurance premiums
Laboratory feesNutritional supplements
Long-term careVacation days

What are the pros and cons of a health savings account?

Health savings accounts have several benefits, but it’s not all positive. Opening an HSA requires being on an HDHP, which means you could pay a considerable amount out of pocket before your insurance plan foots the bill. Consider the following pros and cons when deciding whether to open an HSA.


  • Tax-free contributions

  • Funds in an HSA don’t expire

  • You can invest your HSA funds for potential growth

  • Qualifying withdrawals are tax-free

  • Your employer can contribute to your HSA

  • Covers a wide variety of medical expenses

  • Other people can contribute to your HSA

  • After-tax contributions can be deducted from your gross income on tax returns

  • An HSA becomes more flexible at age 65


  • Not everyone is eligible

  • You must have a high-deductible health plan

  • Taxes and penalties for non-qualifying expenses

  • Might not cover unexpected expenses

  • You must keep your receipts to prove withdrawals were for qualifying expenses

  • Some HSAs charge fees

  • Invested HSA funds could lose money

  • Not all medical expenses qualify for tax-free withdrawals

  • You can no longer make contributions once enrolled in Medicare

Health savings account FAQs

  • A flexible spending account (FSA) is an employer-owned account that allows you to set aside pre-tax funds for eligible healthcare expenses. Unused funds don’t roll over at the end of the year. Instead, they’re forfeited back to your employer. FSAs are typically paired with traditional healthcare plans. An HSA is individually owned, funds never expire, and you must be on a high-deductible health plan to open one. HSA funds are investable, while FSA funds are not.

  • You can open an HSA as a self-employed business owner if you have a qualifying high-deductible health plan and don’t have Medicare coverage. Self-employed people are subject to HSA contribution limits set by the IRS.

  • Generally, you can’t use HSA funds to pay your insurance premiums, including premiums already paid in which you’re looking for a credit or deduction. Sometimes, you can use HSA funds for insurance premiums for policies that cover medical care.

  • HSA funds never expire. If you have unused funds left over at the end of the year, they automatically roll over to the next. There’s also no time limit for reimbursing yourself for qualified medical expenses. You can save up receipts for medical expenses long-term to build up tax-free earnings in your HSA and get reimbursed later.

  • An HSA is yours even after you leave your current employer. Any funds in your HSA are yours to use tax-free for qualified medical expenses. You must have HDHP coverage and not be covered by Medicare to contribute to an HSA, but you can still use HSA funds if you’re no longer eligible to contribute additional money. HSA funds never expire and automatically roll over each year indefinitely.

Kevin Payne
Kevin Payne

Kevin Payne is a freelance writer and family travel and budget enthusiast behind FamilyMoneyAdventure.com. His work has been featured in Forbes Advisor, CreditCards.com, Bankrate, SlickDeals, Finance Buzz, The Ascent, Student Loan Planner, and more. Kevin lives in Cleveland, Ohio with his wife and four teenagers.