The Health Savings Account was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, signed into law by President George W. Bush on December 8, 2003. The accounts became available to the public on January 1, 2004, when Section 223 of the Internal Revenue Code took effect.1Congress.gov. Public Law 108-173 – Medicare Prescription Drug, Improvement, and Modernization Act of 2003
The Archer MSA Came First
The 2003 law didn’t invent the concept from scratch. Congress had already spent seven years running a smaller pilot called the Archer Medical Savings Account, created by the Health Insurance Portability and Accountability Act of 1996 under Section 220 of the Internal Revenue Code.2Office of the Law Revision Counsel. 26 U.S. Code 220 – Archer MSAs
The Archer MSA was deliberately narrow. Only self-employed individuals and employees of businesses with 50 or fewer workers could open one. Total participation was capped at 750,000 accounts nationwide, and the program carried an initial expiration date of December 31, 2000, later extended through 2002. Enrollment never came close to the cap, which told Congress that the mechanics worked but the eligibility rules were suffocating adoption.
What the 2003 Law Set Up
The Medicare Modernization Act stripped away the pilot’s guardrails. There was no participation cap, no expiration date, and no restriction based on employer size. Anyone enrolled in a qualifying high-deductible health plan could open an HSA.
For the 2004 tax year, a plan qualified as an HDHP if it carried a minimum annual deductible of $1,000 for self-only coverage or $2,000 for family coverage, with total out-of-pocket costs capped at $5,000 for an individual or $10,000 for a family.3Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts The maximum contribution that first year was $2,600 for self-only coverage and $5,150 for family coverage.4Internal Revenue Service. IRS Notice 2004-50 – HSA Guidance Account holders aged 55 and older got a catch-up contribution, starting at $500 in 2004 and stepping up by $100 each year until it reached $1,000 in 2009, where it has stayed.
All of those figures were indexed to inflation, which is why every dollar threshold in the program has drifted upward every year since.
The Tax Structure That Hasn’t Changed
The feature that made HSAs distinct in 2004 and still does is the way the tax treatment stacks. Contributions reduce taxable income, whether you take an above-the-line deduction for your own contributions or receive employer contributions excluded from gross income. Interest and investment growth inside the account are tax-exempt. Withdrawals for qualified medical expenses come out tax-free.3Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
A 401(k) gives the deduction going in and taxes the money coming out. A Roth IRA does the opposite. An HSA does both, as long as the withdrawals cover healthcare.
Two other original features have proved durable. Balances roll over indefinitely, with no annual forfeiture rule of the sort that governs Flexible Spending Accounts. And the account belongs to the individual, not the employer, so it survives job changes.
What Has Changed Since 2004
The most significant legislative changes came through the Affordable Care Act in 2010, and both narrowed the account rather than expanding it.
Effective January 1, 2011, the penalty for withdrawing HSA funds for non-medical purposes doubled from 10% to 20%. That penalty applies on top of regular income tax on the withdrawn amount. It disappears at age 65, or upon disability or death, after which non-qualified withdrawals are taxed as ordinary income with no extra surcharge.3Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
The ACA also removed over-the-counter medications from the list of qualified medical expenses unless a doctor prescribes them. Before 2011, HSA funds could be spent on things like ibuprofen or allergy pills straight off the shelf. Afterward, only OTC items not classified as medicines or drugs, such as bandages and blood-sugar test kits, stayed eligible without a prescription. Insulin was specifically exempted from the restriction.
Everything else that has changed is inflation. For 2026, the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, with the $1,000 catch-up still available at 55 and older.5Internal Revenue Service. Revenue Procedure 2025-19 – HSA Inflation Adjusted Amounts for 2026 Contribution limits have roughly doubled since 2004, and the HDHP deductible and out-of-pocket thresholds have each climbed about 70%.
The Medicare Cutoff
One rule from the original 2003 statute deserves a flag because it catches people at retirement. Enrolling in any part of Medicare drops your HSA contribution limit to zero for that month and every month after.3Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts That includes the automatic Part A enrollment that comes with claiming Social Security after age 65. The existing balance stays yours and can still be spent tax-free on qualified medical expenses, including Medicare premiums and copays. Only new contributions are blocked.