What is a health savings account (HSA)?
Editorial staff, J.P. Morgan Wealth Management
- A health savings account (HSA) is a tax-advantaged account meant to save for medical expenses.
- You can open an HSA through your employer (if they offer it) or directly through a financial institution.
- To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP).
- Like with any investment account, there are pros and cons to an HSA. If you’re interested in opening one, it may be helpful to speak with a financial advisor first.
Health savings account: Definition
A health saving account, often referred to as an HSA, is a tax-advantaged medical savings account available to those enrolled in a qualifying health plan. Its primary purpose is to save for and pay for qualified medical expenses.
HSA rules and requirements
While HSAs are common, not everyone is eligible to open one. To open an HSA, you must meet these requirements:
- You can’t be claimed as a dependent on another person’s tax return.
- You must be enrolled in an HSA-eligible plan, also called a high-deductible health plan (HDHP).
- You can’t be on Medicare.
- You can’t have additional medical coverage that isn’t an HDHP (although dental, vision, disability and long-term care insurance are permitted).
So how do you know if you’re enrolled or may want to enroll in an HSA-eligible plan? Well, these plans have higher deductibles than traditional health insurance plans. This means that while monthly premiums are usually lower, the amount you pay for medical services before insurance kicks in (aka the deductible) is higher.
Given the risk of racking up steep medical bills that won’t be covered by insurance, high-deductible health plans are generally recommended more for younger people without chronic health problems. But if you’re enrolled in an HDHP and you do end up with lots of medical expenses, you can use the money in your HSA to cover them.
According to the IRS, to qualify as a high-deductible health plan in 2025, a plan must have a deductible of at least $1,650 for self-only coverage and $3,300 for family coverage. It must also limit yearly out-of-pocket expenses to $8,300 for self-only coverage and $16,600 for family coverage.
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Expenses covered
Here’s a list of expenses that are typically considered “qualified medical expenses” that you can pay for using your HSA:
- Doctor visits
- Medically necessary surgeries
- Prescription drugs
- Ambulance costs
- Psychological therapy/psychiatric care
- Hearing aids
- Acupuncture
- Qualified long-term care services
- Certain dental expenses
Examples of medical expenses that you likely won’t be able to pay for using your HSA include cosmetic surgeries, insurance premiums, nonprescription medicines and funeral/burial expenses.
There may be exceptions depending on your specific HSA rules, so you can address questions regarding qualified medical expenses to your HSA provider.
HSA contributions and withdrawals
There are a few ways to make HSA contributions. If you have the account through your employer, you can make pre-tax payroll contributions. If you have the HSA at a financial institution separate from your employer, you can make post-tax contributions and deduct them from that year’s taxes when you file. There is a limit to the amount of money you can contribute per year.
As far as how you withdraw money from your HSA, this may depend on your HSA provider and their specific rules. However, many HSAs can function like normal bank accounts, and you can pay expenses using a check, debit card, transfer to another account, etc.
You may be required to keep receipts to prove that you withdrew the funds for qualified medical expenses. You can technically use the funds to cover non-qualified expenses of any nature, but with these you’ll be subject to income tax and potentially a penalty charge.
Contribution limits for an HSA
Here are the HSA contribution limits for the 2024 tax year:
- Self-only coverage: $4,150
- Family coverage: $8,300
- Additional catch-up contributions allowed for 55 and older: $1,000
Here are the HSA contribution limits for the 2025 tax year:
- Self-only coverage: $4,300
- Family coverage: $8,550
- Additional catch-up contributions for 55 and older: $1,000
For clarification, this means that if you’re age 55 or older, you can contribute an additional $1,000 per year to your HSA. For 2024, this would put your total contribution limit at $5,150 for self-only coverage and $9,300 for family coverage. For 2025, it would be $5,300 for self-only coverage and $9,550 for family coverage.
Withdrawals from an HSA
When it comes time to withdraw money from your HSA, here are the rules to keep in mind:
- HSA funds paid toward qualified medical expenses are tax- and penalty-free.
- If you’re age 65 or older, you can also use HSA funds for non-medical expenses without penalty, but you will owe income tax on the amount you withdraw.
- If you’re younger than 65, you can still use HSA funds for non-medical expenses, but you’ll owe income taxes and a 20% penalty.
Who can contribute to an HSA?
As an individual, you are eligible to contribute to an HSA as long as you’re enrolled in a qualifying high-deductible health plan (HDHP) and you’re not claimed as a dependent on someone else’s taxes.
If you get your HSA through your employer, your employer may also contribute funds in what’s called an employer match. In this case, your employer would match the funds you contribute to your HSA up to a certain amount (at their discretion). Not every employer offers this perk, but if you’re interested in opening an HSA, it may be worth checking out.
Some HSA holders turn 65 and choose to enroll in Medicare. At that point, they are no longer eligible to contribute to the HSA, but they can still access and use the funds they’ve built up.
HSA benefits and drawbacks
Like any financial move, opening an HSA comes with pros and cons. Factors you may consider in the decision include age, health condition and financial status.
If you’re on the fence about opening an HSA, or would like to learn more about it, you may benefit from consulting with a qualified financial advisor who can give tailored guidance based on your circumstances.
HSA pros
Here are some of the pros to opening an HSA:
- Contributions, growth and withdrawals are all tax-free (if used on qualified medical expenses).
- It offers extra protection against medical expenses, which tend to rise as you get older.
- Those ages 65 and older can use HSA funds for non-medical expenses without penalty (but they will owe taxes).
- Funds can be carried over year to year.
- Some employers who offer HSAs will match funds, which is free money if you’re willing to contribute.
- Many Medicare-related expenses, such as out-of-pocket drug costs, qualify for use of HAS funds.
HSA cons
Here are some of the cons to opening an HSA:
- You must be enrolled in a high-deductible health plan (HDHP), which may leave you with steep overall costs if you have significant medical expenses.
- If you use HSA funds for non-qualified expenses before the age of 65, you will be subject to a 20% penalty.
- Some medical expenses may not qualify for HSA coverage. This largely depends on your HSA provider and what services and procedures they consider medically necessary and worthy of coverage.
HSA vs. FSA
Health savings accounts (HSAs) are often compared with flexible spending accounts (FSAs). They are both tax-advantaged accounts designed to save for and pay for qualified health care costs, and often you can get them through your employer. However, there are key differences between the two.
Differences between HSAs and FSAs include:
- HSAs require you to be enrolled in a high-deductible health plan (HDHP), whereas FSAs have less specific insurance requirements (you just can’t be enrolled in a Marketplace plan).
- You can only open an FSA through your employer, whereas you can open an HSA through an employer (if they offer it) or on your own.
- HSAs have higher annual contribution limits, including catch-up contributions for those age 55 and older.
- HSA funds roll over year to year without exception, but FSAs may require you to use the funds within the year. Some FSAs may carry over a set amount to the next year or provide an extra grace period for you to use the money.
HRA vs. HSA
HSAs are also sometimes compared with health reimbursement arrangements, or HRAs. While both accounts are intended to pay for qualified medical expenses, HRAs are much more employer-based.
Here are some of the key differences between HSAs and HRAs:
- HRAs are employer-funded group health plans – the only one who contributes is the employer. Meanwhile, HSAs can be opened through an employer or by an individual, and typically the only time employers contribute is if they offer to match employee contributions.
- The rules and requirements of an HRA depend on your employer and plan. Plans typically cover qualified medical expenses up to a certain dollar amount per year, and unused funds may or may not carry over depending on the plan. HSAs, on the other hand, can be used to cover any amount of qualified expenses in a year, and HSA funds carry over year to year.
- HSA-qualified medical expenses do not include health insurance premiums, whereas some types of HRAs will pay for monthly premiums on a health plan you buy yourself.
How to open an HSA
Opening an HSA, if you qualify for one, can be a straightforward process. Here are some steps to help guide you through the process.
- Determine eligibility: You must be enrolled in a qualifying HSA-eligible/high-deductible health plan (HDHP) to open an HSA. You must also not be claimed as a dependent on someone else’s taxes, and you typically can’t have supplementary health coverage that’s not an HDHP (you can’t be on Medicare, for instance).
- Consider speaking with a financial advisor: If you’re unsure of how to proceed, or you’re not enrolled in an HDHP and wondering if you should so you can qualify for an HSA, think about talking to a financial advisor. Their job is to help guide your decision based on their industry expertise and your specific situation.
- Check if your employer offers an HSA: Many employers offer HSAs. Some also offer to match employee contributions. If you have this option, it may be beneficial to take it, as a matching contribution is free money. Plus, your HSA contributions would be pre-tax, and you wouldn’t have to worry about deducting them when you file your taxes.
- Choose a provider: Whether your employer offers an HSA or not, there are many financial institutions that allow you to open one independently. Explore your options so you can choose a provider you feel comfortable with. This may involve chatting with HR if you want to go the employer route, or researching and calling banks to get information on their HSA options.
- Apply for an HSA: Once you’ve chosen a provider, move to open the HSA. If the HSA is through your employer, this may involve coordinating with HR so they either open the account for you or provide you with the information to do so yourself. If you’re opening the HSA on your own, you’ll typically need to apply with your chosen financial institution, which may necessitate a photo ID, Social Security number and proof of enrollment in an HDHP.
- Start contributing: Make your first contribution to your HSA. This may be easier with an employer, as it will come out of your paycheck before you get it. On your own, you may want to consider setting up automatic transfers so you don’t have to remember to manually contribute to the account. Keep in mind annual contribution limits, which tend to go up every year.
The bottom line
If you’ve been asking yourself, “What is a health savings account?”, you’re hopefully more informed on its purpose and if you’re eligible to open one. HSAs are versatile, tax-advantaged accounts that can help you prepare for medical expenses and retirement.
While health savings accounts are not suitable for everyone, doing some research or speaking with a qualified financial advisor can help you decide whether an HSA is for you and, if so, the best way to open, fund and use it.
FAQs
Yes, health savings accounts (HSAs) that haven’t been spent automatically roll over from year to year.
Whether an HSA is worth it depends on the person. However, if you qualify for one (meaning you’re enrolled in a high-deductible health plan), then an HSA can be a great investment. It’s triple tax-advantaged – the contributions you make now are tax-deductible, growth isn’t taxed and withdrawals aren’t taxed, as long as you use them for qualified medical expenses. After age 65, you can even use HSA funds for other expenses, though you’ll pay income tax if they’re not medical-related. This means an HSA can act as a retirement account as well as a health fund, although you’re more likely to have medical expenses in retirement anyway.
An HSA should be easy to open, as long as you qualify. First, you may want to check with your employer to see if they offer an HSA. Some employers will match your contributions, which is essentially free money if you take advantage of it. If your employer doesn’t offer an HSA, you can check with your bank – many financial institutions offer HSAs. You can also ask your health insurance company if they partner with HSA financial institutions.
To be eligible for an HSA, you must:
- Be at least 18 years old
- Not be claimed as a dependent on someone else’s tax return
- Be enrolled in an HSA-eligible plan, known as a high-deductible health plan (HDHP)
- Not be covered by Medicare, or any other health plan that pays for your medical expenses without you contributing a copayment or deductible first
Yes, you can use your HSA to pay for qualified medical expenses for your spouse and dependents.
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Editorial staff, J.P. Morgan Wealth Management
