What Are Health Savings Accounts and How Do They Work

A health savings account, or HSA, is a tax-advantaged account you can use to pay for medical expenses when you’re enrolled in a qualifying high-deductible health plan. Contributions reduce your taxable income, the balance grows tax-free, and withdrawals for qualified medical costs come out tax-free at any age. For 2026, you can put in up to $4,400 with self-only coverage or $8,750 with family coverage, plus an extra $1,000 if you’re 55 or older.¹

Who Can Open and Contribute to an HSA

Eligibility starts with your insurance. You have to be enrolled in what the IRS calls a high deductible health plan (HDHP). For 2026, that means a plan with an annual deductible of at least $1,700 for self-only coverage or $3,400 for family coverage, with out-of-pocket costs (deductibles, copays, and coinsurance, but not premiums) capped at $8,500 for an individual or $17,000 for a family.¹

Three other conditions apply. You can’t have any other health coverage that pays for expenses before you hit your HDHP deductible. You can’t be enrolled in any part of Medicare. And no one else can claim you as a dependent on their tax return.²

The FSA Problem

A general-purpose flexible spending account counts as disqualifying coverage because it can reimburse a broad range of medical costs before you meet your deductible. A limited-purpose FSA, which only covers dental and vision expenses, does not disqualify you. If your employer offers both, confirm the FSA is the limited-purpose version before enrolling.

Medicare Ends New Contributions

The moment you become entitled to Medicare, your HSA contribution limit drops to zero.² There’s a twist for people working past 65: Medicare Part A can be applied retroactively up to six months when you enroll in Social Security. If you plan to keep contributing to an HSA past 65, stop contributions at least six months before you sign up for Medicare or Social Security. You can still spend existing HSA funds on qualified medical expenses after Medicare enrollment; only new contributions are blocked.

Bronze and Catastrophic Plans Now Qualify

Starting January 1, 2026, the One, Big, Beautiful Bill Act (OBBBA) treats bronze-level and catastrophic health plans as HSA-compatible coverage, even when they don’t meet the traditional HDHP deductible floor. The IRS has confirmed the change applies whether the plan is bought through the marketplace or directly from an insurer.³ The standard HDHP out-of-pocket maximums of $8,500 and $17,000 don’t apply to these plans.⁴

How Much You Can Contribute in 2026

The IRS sets an annual cap that covers everything going into the account — your payroll deductions, direct deposits, and any employer contributions combined:

Self-only coverage: $4,400
Family coverage: $8,750
Age 55 and older: an additional $1,000 catch-up contribution

The catch-up amount is fixed by statute and doesn’t adjust for inflation.² Contribute more than the limit and the IRS charges a 6% excise tax on the excess every year it stays in the account. You can avoid the penalty by pulling out the overage, plus any earnings on it, before your tax filing deadline including extensions.⁵

The Last-Month Rule

If you become HSA-eligible partway through the year, you don’t have to prorate. As long as you’re eligible on December 1, you can contribute the full annual amount for that year. The condition: you have to stay eligible for the entire following calendar year, called the testing period. Lose eligibility during that window for any reason other than death or disability and the extra contributions become taxable income, with a 10% additional tax on top.⁵

The Three Tax Benefits

HSAs are often called the only triple tax-free account in the federal tax code, and the label holds up. Contributions made through employer payroll deductions avoid both income tax and FICA taxes. Direct contributions with after-tax dollars still get an income tax deduction on your federal return, though not the payroll tax savings.⁶

Interest and investment gains inside the account aren’t taxed each year, so the balance compounds without the drag you’d get in a regular brokerage or savings account. And distributions for qualified medical expenses come out completely tax-free.⁵

Spend the money on something other than a qualified medical expense before age 65 and you owe income tax on the distribution plus a 20% penalty. After 65, the 20% penalty goes away, and non-medical withdrawals are simply taxed as ordinary income, similar to a traditional IRA distribution.⁵

A handful of states, notably California and New Jersey, don’t follow the federal treatment. Residents there may owe state income tax on contributions and earnings even though the federal benefits still apply.

What Counts as a Qualified Medical Expense

Qualified medical expenses are defined broadly under Section 213(d) of the tax code, with the detailed list in IRS Publication 502. Covered costs include doctor visits, hospital bills, prescription drugs, lab work, dental care (cleanings, fillings, orthodontics), vision care (exams, glasses, contacts), and mental health services. Durable medical equipment such as crutches, hearing aids, and wheelchairs qualifies, along with premiums for qualified long-term care insurance up to annual limits tied to your age.⁷

Since the CARES Act took effect in 2020, over-the-counter medications and menstrual care products qualify without a prescription.⁸ Starting January 1, 2026, the OBBBA adds direct primary care service fees to the list, as long as the monthly fee doesn’t exceed $150 for individual coverage or $300 for an arrangement covering more than one person.⁴

What Doesn’t Count

Cosmetic procedures like face lifts, hair transplants, and teeth whitening are excluded unless they correct a deformity from a congenital condition, accident, or disfiguring disease. Gym memberships and health club dues don’t qualify even with a doctor’s recommendation, and neither do nutritional supplements unless prescribed for a diagnosed condition. Maternity clothes, funeral expenses, and general wellness activities such as dance or swimming lessons are also out.⁷

Keep receipts for every withdrawal. There is no deadline to reimburse yourself for a qualified expense; you can pay out of pocket today and pull the money out years later. But if the IRS questions a distribution, you’ll need documentation showing it was for a qualified purpose.

Ownership, Portability, and Spouses

Unlike a 401(k), an HSA belongs to you, not your employer. Change jobs, get laid off, or leave the workforce and the account and its full balance go with you.⁵ You can transfer the account to a different custodian whenever you want.

Funds never expire. There’s no use-it-or-lose-it rule like most FSAs have. Money deposited in your twenties can sit and compound for decades and still be withdrawn tax-free for medical costs in retirement, which is why many people who can afford to pay current medical bills out of pocket let the HSA balance grow instead.

Each spouse who wants an HSA has to open a separate account; joint HSAs don’t exist. You can still use your HSA to pay for qualified expenses incurred by your spouse or dependents even if they aren’t covered under your HDHP.⁵

What Happens to the Account When You Die

The tax treatment at death depends entirely on who you name as beneficiary. If your spouse is the designated beneficiary, the account simply becomes their HSA and continues under the same rules.

If a non-spouse inherits it, the account stops being an HSA immediately, and its full fair market value on the date of death becomes taxable income to the beneficiary that year. The beneficiary can reduce the taxable amount by any qualified medical expenses of the deceased that they pay within one year after the date of death. If the estate is the beneficiary, the account value is included on the deceased’s final tax return.⁵

Investing the Balance

Most HSA custodians let you invest your balance in mutual funds, index funds, and similar options once you meet a minimum cash threshold, typically a few hundred to a couple thousand dollars that has to stay in cash. Invested funds are still part of your HSA and can be liquidated when you need them, with settlement usually taking a few business days.

Whether to invest depends on your time horizon. If you’re drawing on the account regularly for current medical costs, keeping enough cash on hand for several months of expected expenses avoids selling investments at a bad moment. If you can pay medical bills from other funds and let the HSA grow, investing takes full advantage of the tax-free compounding, which over a career can build a meaningful retirement healthcare fund.

Custodian fees vary. Monthly maintenance charges range from $0 to around $10, and some custodians charge separate investment administration fees, so comparing costs before choosing a provider matters, especially on a smaller balance.

Reporting Contributions and Distributions

If you contributed to an HSA, took distributions, or inherited an HSA during the year, you have to file IRS Form 8889 with your federal return. That requirement applies even if you have no taxable income or wouldn’t otherwise need to file. Married couples who each have an HSA file separate Forms 8889.⁹

Form 8889 is where you calculate your contribution deduction, report distributions, and figure any additional taxes owed on non-qualified withdrawals or a failed testing period. Your custodian sends you Form 5498-SA (contributions) and Form 1099-SA (distributions) to help you fill it out.

Opening an Account

You can open an HSA through your employer’s benefits program or directly with a bank, credit union, or specialized custodian. You’ll need your Social Security number, proof of HDHP enrollment (your insurance card or benefits summary has the plan details), and a beneficiary designation.

If your employer offers payroll deductions into an HSA, that route is usually best because contributions bypass both income tax and FICA taxes. Direct contributions still qualify for the income tax deduction but not the payroll tax savings. Most accounts activate within a few business days, and the custodian issues a debit card tied to the account for paying medical expenses directly.

1
Internal Revenue Service. Rev. Proc. 2025-19
2
Office of the Law Revision Counsel. 26 U.S. Code 223 – Health Savings Accounts
3
Internal Revenue Service. Treasury, IRS Provide Guidance on New Tax Benefits for Health Savings Account Participants Under the One, Big, Beautiful Bill
4
Internal Revenue Service. Notice 2026-05 – Expanded Availability of Health Savings Accounts Under the OBBBA
5
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
6
Internal Revenue Service. HSA Contributions – IRS Courseware
7
Internal Revenue Service. Publication 502 – Medical and Dental Expenses
8
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
9
Internal Revenue Service. Instructions for Form 8889