What Is an HSA Account and How Does It Work?

A Health Savings Account, or HSA, is a tax-advantaged account you use with a high deductible health plan to pay for medical costs. It works on three tax breaks stacked together: money goes in pre-tax, grows tax-free while it sits there, and comes out tax-free when you spend it on qualified medical expenses. Unlike a Flexible Spending Account, the balance rolls over every year and stays with you when you change jobs or retire. For 2026, you can contribute up to $4,400 with self-only coverage or $8,750 with family coverage.

Who Can Open One

You need to be covered by 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, and an out-of-pocket maximum no higher than $8,500 for an individual or $17,000 for a family. Premiums don’t count toward the out-of-pocket cap.¹

Three other conditions have to be true. You can’t have other coverage that pays benefits before your HDHP deductible is met, such as a spouse’s traditional plan or a general-purpose FSA. You can’t be enrolled in Medicare Part A or Part B. And you can’t be claimed as a dependent on someone else’s tax return.²

New in 2026: Bronze Plans and Direct Primary Care

Starting January 1, 2026, the One Big Beautiful Bill Act treats Bronze-level and catastrophic ACA marketplace plans as HDHPs for HSA purposes, even when they don’t meet the traditional HDHP deductible thresholds. The IRS has said these plans don’t have to be purchased through an Exchange to qualify.³

The same law made direct primary care (DPC) arrangements compatible with HSAs. If you pay a monthly fee to a DPC practice for routine care, that no longer disqualifies you, and the periodic DPC fees now count as qualified medical expenses you can pay from the account tax-free.³

How Much You Can Contribute in 2026

The 2026 limits depend on your coverage type:

Self-only HDHP coverage: up to $4,400
Family HDHP coverage: up to $8,750
Age 55 or older: an extra $1,000 catch-up contribution

These caps apply to the total from every source combined: your own deposits, your employer’s contributions, and anything a family member puts in for you.⁴ No matter who funds it, you own every dollar in the account the moment it lands.²

You have until the federal tax filing deadline, typically April 15 of the following year, to make contributions for a given tax year. A deposit made between January 1 and April 15, 2027, can count for 2026 as long as you stay under the cap.⁵

The Last-Month Rule

If you become HSA-eligible partway through the year, the last-month rule can still let you contribute the full annual amount. If you’re eligible on December 1, the IRS treats you as eligible for the whole year. There’s a 13-month testing period attached: you have to stay eligible from that December through December 31 of the following year. Lose eligibility during the testing period and the extra contributions get added back to your income and hit with a 10% additional tax.⁵

The Three Tax Breaks in Practice

Money going in is pre-tax. Contributions made through payroll bypass federal income tax and FICA. Contributions you make yourself, such as by transfer from a bank account, are deductible on your federal return whether or not you itemize.⁵

Money sitting in the account grows without tax. Interest, dividends, and investment gains inside the HSA are not taxed, unlike a regular brokerage account.⁵

Money coming out for qualified medical expenses is tax-free at the federal level.⁵ A few states, including California and New Jersey, don’t follow the federal treatment, so state income tax may apply to contributions and earnings there.

What Counts as a Qualified Medical Expense

Qualified expenses cover a broad range of care: prescriptions, dental work, eye exams, glasses and contacts, lab tests, mental health treatment, and surgical procedures. Deductibles, copays, and coinsurance your insurance doesn’t cover also qualify.⁶

Most custodians give you a debit card tied to the account. You can also pay out of pocket and reimburse yourself later, with no deadline on when the reimbursement has to happen. That means a bill you pay today can be reimbursed from the HSA years from now. Keep the receipts either way. If the IRS questions a withdrawal, you’ll need documentation that the expense was medical.

Insurance Premiums

Health insurance premiums generally are not qualified expenses. Four exceptions let you pay premiums from the HSA tax-free:

COBRA continuation coverage
Health coverage while receiving unemployment compensation
Medicare premiums (Parts A, B, C, or D) once you’re 65 or older, but not Medigap
Long-term care insurance, up to age-based limits adjusted each year

These exceptions tend to matter at the moments people most need the flexibility: job loss, retirement, and aging into long-term care.⁵

What Happens If You Spend It on Something Else

Take money out for something other than a qualified medical expense before 65 and you owe ordinary income tax on the amount plus a 20% penalty.² That’s a genuinely bad deal in most situations.

After 65 the 20% penalty goes away. Non-medical withdrawals are still taxed as ordinary income, but nothing extra on top, so the HSA behaves like a traditional IRA at that point. The penalty also gets waived if you become disabled.⁵

Investing the Balance

Most HSA custodians let you invest your balance in mutual funds, ETFs, and sometimes individual stocks once you’ve accumulated enough cash. There’s usually a minimum cash balance you have to keep before the investment option opens up, and it varies by custodian. Some charge no investment fees, others charge a small monthly amount.

Investing is where the HSA becomes a long-term savings tool rather than a checking account for medical bills. Because growth is never taxed and qualified withdrawals aren’t either, a balance that compounds over 20 or 30 years can cover a real chunk of retirement healthcare costs. People who get the most from an HSA tend to pay current medical bills out of pocket and leave the balance alone to grow.

Fixing an Excess Contribution

If total contributions in a year exceed the annual limit, the IRS charges a 6% excise tax on the excess for every year it stays in the account. The fix: pull the excess (and any earnings on it) out before your tax filing deadline, including extensions. Do that in time and the excise tax doesn’t apply.⁵

This is easy to trip on when you change jobs mid-year and both employers contribute, or when your coverage shifts from family to self-only. Track the running total across every source during the year, not just at tax time.

What Happens to the Account When You Die

The outcome depends on who you name as beneficiary. A spouse who inherits the HSA takes it over as their own account and can keep using it tax-free for qualified medical expenses.²

Anyone else gets a much worse result. The HSA stops being an HSA on the date of death and the whole balance becomes taxable income to the beneficiary in the year they inherit it. The beneficiary can reduce that taxable amount by any of your qualified medical expenses they pay within one year of your death, but the tax hit can still be significant. If no beneficiary is named, the balance goes to your estate and is taxed on your final return.²

Reporting Your HSA on Your Taxes

Every year you have an HSA, you file Form 8889 with your federal return. It reports contributions from you and your employer, calculates your deduction, and accounts for the distributions you took. The 20% additional tax on any non-medical withdrawal is calculated on Form 8889 as well. If you used the last-month rule, Form 8889 is where the IRS tracks whether you kept eligibility through the testing period.⁷ Your custodian will send you statements each tax season showing your distributions and contributions, and those numbers feed directly into the form.

1
Internal Revenue Service. Revenue Procedure 2025-19 – 2026 Inflation Adjusted Items for HSAs
2
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
3
Internal Revenue Service. Treasury, IRS Provide Guidance on New Tax Benefits for HSA Participants Under the One, Big, Beautiful Bill Act
4
Internal Revenue Service. Expanded Availability of Health Savings Accounts Under the One, Big, Beautiful Bill Act
5
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
6
Internal Revenue Service. Frequently Asked Questions About Medical Expenses Related to Nutrition, Wellness and General Health
7
Internal Revenue Service. About Form 8889, Health Savings Accounts (HSAs)