What Is an HSA and How Does It Work?

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An HSA or Health Savings Account is where you could put away money to help pay for qualified medical expenses, such as prescriptions and doctor visits.

Generally speaking, you need to meet these requirements to be able to fund an HSA:

  1. Your health insurance plan has to be considered a High Deductible Healthcare Plan (HDHP). Your employer or insurance company will be able to tell you if you’ve got an HDHP. For more information on what qualifies as HDHP, visit Healthcare.gov.
  2. You have no other health coverage except what is permitted under IRS rules (see "Other health coverage").
  3. You’re not covered by Medicare.
  4. You’re not listed as a dependent on someone else’s tax return.

In this article, we'll go over the basics of an HSA, so that you can decide if it's right for you.

Good to know: Do not confuse HSAs with HRAs (Health Reimbursement Arrangements) or FSAs (Flexible Spending Accounts), which work a little differently.

Potential benefits of an HSA 

If you qualify, an HSA can be a great tool to help you save for near-term or future healthcare expenses. Once you open an account, your HSA is portable, meaning it stays with you even if you change jobs or retire. 

Other key points to keep in mind:

  1. Contributions to your HSA may be tax-deductible.
  2. Distributions from your HSA are tax-free if you use them to pay for qualified medical expenses.
  3. There are limits to how much you can put into your HSA each year.
  4. Money in your HSA doesn't expire and there are no required minimum distributions.

Isn’t an HSA just an emergency fund with a different name?

To be sure, health expenses can sometimes be emergency expenses. But an HSA is a specific type of savings account that’s dedicated to paying for qualified medical expenses. 

Also, unlike a traditional savings account, an HSA can provide potential tax benefits.

For instance, if you’re contributing money to your HSA, you won’t pay federal taxes on the interest earned (unlike the interest you earn with a traditional savings account or a certificate of deposit).

And depending on how it’s funded, there could be an additional benefit: If the money you contribute to an HSA is taken out of your paycheck before taxes, this could lower your taxable income.

If you fund an HSA using after-tax dollars, you may be able to deduct these contributions on your tax return, but it’s a good idea to double-check with a tax professional to see if you're eligible to claim the deduction.

What can you spend your HSA money on?

You can use your HSA funds to pay for qualified medical expenses. The IRS explains what's considered a qualified medical expense in IRS Publication 969: Health Savings Accounts and Publication 502: Medical and Dental Expenses.

Your HSA provider will also be able to provide guidance on what types of expenses are covered. For example, qualified expenses can include things like co-pays, prescriptions, and certain medical supplies.

Good to know: According to IRS rules, generally, insurance premiums are not considered qualified medical expenses unless the premiums are for any of the following: 

  1. Long-term care insurance.
  2. Health care continuation coverage (such as coverage under COBRA).
  3. Health care coverage while receiving unemployment compensation under federal or state law.
  4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

See IRS Publication 969, “Distributions from an HSA” for details. 

What happens if you use your HSA funds for non-qualified expenses?

Your withdrawals will be taxed as income, and you may face an additional 20% tax from the IRS.

However, if you’re over the age of 65, you won’t have to pay the additional 20% tax, but your withdrawals could be taxed as income if you use the money for something that’s not a qualified medical expense.

If you have any questions about opening and using an HSA, check in with a financial advisor or tax professional.

How do you add money to an HSA?

There are two general ways to fund your HSA:

  • If your HDHP is through work, your company can withdraw money from your paycheck – before taxes – and deposit it in your HSA.
  • In some cases, you may be covered by an HDHP that qualifies for an HSA but need to set up your account through a financial institution, such as a brokerage or bank. If that’s the case, you can deposit the funds directly with that institution.

How much can you contribute to an HSA each year?

As long as you have an HDHP, you can contribute to an HSA, but contributions are subject to annual limits by the IRS. 

In 2024, you may contribute up to $4,150 to your HSA if the policy is just for you (aka, self-only coverage). If the policy covers your family, you may contribute up to $8,300. And if you're 55 or older, you could make an additional "catch-up" contribution of up to $1,000.

In 2025, the contribution limit for an individual with self-only coverage is $4,300. For someone with family coverage, the contribution limit is $8,550. If you’re 55 or older, you could make an additional catch-up contribution of up to $1,000.

Note: Contribution rules are always subject to change. Always visit the IRS webpage for the most up-to-date information.

What happens to your HSA if you no longer have an HDHP?

If you switch to a healthcare plan that is not an HDHP, you get to keep the money you’ve saved in your HSA. You can also continue to spend the money on qualified medical expenses. The only real change is that you won’t be able to add more money to your HSA if your new health plan is not an HDHP.

Saving for a better future? See how you can start growing your money today with a Marcus Online Savings Account.

This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed.