How Does an HSA (Health Savings Account) Work?

Christian Worstell
In this article...
  • A health savings account (HSA) is a personal account you can use to pay for health care expenses. The money you contribute to your HSA is tax free, and you may be able to invest some of your HSA funds to earn dividends that are also tax free.

There are numerous ways to pay for health care, and among those options is a health savings account, or HSA. 

Below we discuss what an HSA is, how it works and everything else you need to know about how to use an HSA to maximize your health care dollars. 

What Is an HSA?

An HSA is a personal savings account that works in tandem with a high-deductible health insurance plan (HDHP). The money deposited into an HSA is done so without any federal taxes being taken out of it first. (Most states also have their own HSA tax breaks for state income.) 

This is different from a traditional savings account where the income you receive from a job is taxed first, then given to you and deposited into an account. HSA money is taken directly from your salary or wages and deposited into the HSA account, allowing you to avoid paying taxes on the money and maximizing its value. 

Once the funds are in your HSA account, they may be used to pay for health care costs and other eligible expenses. HSA’s issue members a debit card that may be used at a doctor’s office, pharmacy or wherever the funds are eligible to be spent. 

A high-deductible health plan is a health insurance policy that requires a high deductible, or the amount of money you must spend out of your own pocket on covered care before the plan’s coverage kicks in. If your annual deductible is $5,000, you must spend $5,000 on covered care within the plan year before the plan begins to pick up costs. (Deductibles don’t apply to all health care services.)

HSA funds are often used to pay down a deductible and can also be used to pay for copayments and coinsurance or health care that is not covered by the insurance plan. 

Health insurance plans with HSAs typically have annual deductibles of at least $1,400 for individuals or $2,800 for families in 2022.

HSA-eligible plans must also have an annual out-of-pocket maximum (the most you will be required to pay out of your own pocket during a plan year) of no more than $7,050 for an individual and $14,100 for a family in 2022.

How Do I Contribute to an HSA Account?  

Anyone who wants to contribute money to an HSA account may do so. Most contributions are made by the employee through an automatic paycheck withdrawal or via manual deposit. 

Employers may also contribute to a worker’s HSA as part of a company benefit. And even those with no connection to the employer can make contributions on behalf of the account holder. 

What Can HSA Money Be Used For?

Money in an HSA account can be used to pay for deductibles, copayments and coinsurance for care that is covered by your high-deductible health plan, and can include things like dental, vision and prescription drug costs.

HSA money may be used to cover expenses for your own care or for any other member of your household, even if they aren’t covered by your health insurance plan. 

HSA funds can also often be used to pay for medical services and items that are not covered by your plan. Each HSA operates on its own terms and includes its own list of eligible expenses, but many HSA accounts allow the money to be used for:

  • Acupuncture
  • Birth control and contraceptive devices
  • Fertility enhancement
  • Smoking cessation programs
  • Guide dogs
  • Hearing aids
  • Home care
  • Artificial teeth or limbs 
  • Psychiatric and psychological care
  • Vision correction surgery 
  • Food for special doctor-prescribed diets
  • Crutches, bandages and other medical equipment
  • Reconstructive surgery 
  • Postpartum care 

The CARES Act, signed into law in 2020, allowed for additional products to be purchased with HSA money. You may now use your HSA funds to buy over-the-counter health products like cold and cough medicine, menstrual products, and medications for pain, allergies and heartburn.   

HSA funds can also be used to pay for travel and accommodations needed for medical care. For example, if you needed to travel to a particular city to undergo a procedure, you may be able to use your HSA money to pay for your plane ticket and hotel room. Or if you’re receiving care more local to your area, you may be able to pay for a bus ticket, train ticket or ride-sharing service with your HSA account.  

What Are the Contribution Limits to an HSA?

There is a limit to how much you are allowed to contribute to an HSA account.

In 2022, HSA contribution limits are:

  • $3,650 for those with individual coverage under a high-deductible health plan
  • $7,300 for those with an HDHP that covers at least one other family member 
  • Those age 55 and older may contribute an additional $1,000 per year

If you are enrolled in an HDHP with an HSA in 2022, you have until April 15, 2023, to make contributions to the HSA, even if you are not enrolled in the HDHP in 2023.

Does an HSA Account Expire?

Money in an HSA account never expires, and you will always be able to spend or withdraw any existing funds.

Your HSA account will go with you from year to year and from job to job. If you change from one HSA-eligible health insurance plan to another, you can roll over the money from your old HSA account into your new one. 

You may contribute to an HSA for as long as you are enrolled in an HSA-eligible health plan and are not enrolled in Medicare. 

Can I Withdraw Money From My HSA Account?

You can withdraw money to be spent on qualified health care spending without paying taxes.

You can also withdraw money in your HSA account for non-health uses at any time, but you will have to pay taxes on the money if you’re younger than 65. If you are under the age of 65, you will be charged a 20% penalty by the IRS in addition to paying taxes on the money if you remove funds for purposes other than health care spending.

Once you are at least 65 years old, there is no penalty to withdraw the funds, but you will still owe taxes on any money you withdraw.  

Many HSA cards can be used at an ATM to withdraw funds just like a bank debit card. 

Can HSA Money be Invested?

Many HSA accounts include investment options for members that can include:

  • Stocks
  • Bonds
  • Mutual funds
  • Exchange traded funds (ETFs)

An HSA that allows you to invest your HSA funds can be a great investment vehicle. Your contributions to your HSA are tax free, and your HSA investment earnings and dividends are not taxable income. On top of that, the HSA funds you withdraw to pay for medical care are also tax free.

HSA accounts generally include small interest rate returns, as well.  

Who is Eligible For an HSA?

Anyone enrolled in a high-deductible health insurance plan that includes an HSA is eligible to use the HSA account. It’s important to note that not all high-deductible health plans include an HSA.

You must not be covered by another HDHP. Standalone plans like those for dental, vision, life insurance, disability or special illness plans are excluded. 

You do not have to be an employee to participate in an HSA plan. If you are self-employed, a contract worker or otherwise do not have health insurance through an employer, you may enroll in a high-deductible health plan with an included HSA through your state or federal Health Insurance Marketplace, or exchange (“Obamacare” plans).

Once you are enrolled in Medicare, you may no longer contribute to an HSA. If you still have funds in an existing HSA account at the time you enroll in Medicare, you may continue to use the money in your HSA account but will not be allowed to make any further contributions. 

What Is the Downside of an HSA? 

The advantages of HSA accounts include tax-free savings, the ability for others to contribute, no expiration date on existing funds and a wide range of eligible expenses for which the money can be used for. 

The downside of an HSA is that it requires you to be enrolled in a high-deductible plan where you will be responsible for more upfront health care expenses. 

The fact that the money doesn’t expire is sometimes viewed as a negative, because it may encourage people to continue saving that money rather than using it to seek care that they might need. If the funds expired, account holders would likely be quicker to use it and might cut down on neglected injuries or illnesses. 

Some merchants do not accept HSA cards, which means you will have to pay for the service or item with your own money and then file an application for reimbursement through your health plan. That can not only create a headache but can also tie up your money and require detailed record keeping in the event of a tax audit. 

Where Can You Find an HSA Account? 

Many employers that provide health insurance to employees offer at least one high-deductible health plan as part of the plan lineup. These plans may or may not include an HSA. But even if they don’t include an HSA, you can generally add on to the plan yourself provided that the plan meets the qualifying criteria for HSA use.

HSA Search is a resource you may use to find and compare different HSA accounts. 

Many banks also offer their own HSA accounts. And health insurance companies often partner with HSA companies and can make recommendations for your plan. 

If you are shopping for a health insurance plan on a state or federal marketplace, plans that are HSA-compatible are tagged with an “HSA-eligible” flag in the upper left corner of the plan search results page.  

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with HelpAdivsor.com. He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at Mike@MyHelpAdvisor.com.

Read More
Man Meets With Insurance Counselor
Where can you find the best Medicare Part D prescription drug plans of 2022? We review some of the ...
Smiling man and his adult daughter
Learn about some of the top choices when you're seeking the best life insurance for seniors over 60. ...
Doctor speaks with smiling couple in doctor's office
UnitedHealthcare and Humana are two of the largest health insurance companies in the U.S. How do these ...