What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged account for medical expenses, available to anyone enrolled in a qualifying high-deductible health plan (HDHP). Under federal tax law, it is the only widely available account that is untaxed at all three stages: contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. California and New Jersey don’t follow the federal treatment, so residents of those states pay state income tax on contributions and investment earnings.

That triple advantage makes an HSA unusual. A traditional 401(k) gives you a deduction now and taxes withdrawals later; a Roth gives you tax-free withdrawals but no deduction. An HSA gives you both.

How Does an HSA Work?

You open an HSA with a bank or brokerage, often through your employer, and fund it while you’re covered by a qualifying health plan. The money can sit in cash or be invested, and you withdraw it to pay for qualified medical expenses, either directly or as reimbursement for costs you paid out of pocket.

Contributions made through an employer’s cafeteria plan, including your own payroll deductions, skip both income tax and Social Security and Medicare taxes. Contributions you make on your own are deductible on your return but don’t get the payroll tax exclusion. Either way, the account belongs to you, not your employer, and unspent money rolls over from year to year.

HSA Contribution Limits for 2026

The limits include employer contributions. The age-55 catch-up is a flat $1,000 and is not indexed for inflation. If both spouses are 55 or older, each needs their own HSA to claim it, since the catch-up is per person rather than per account.

The family limit is shared. If either spouse has family coverage, the couple’s combined contributions (not counting catch-up) can’t exceed $8,750, split equally unless you agree on a different division.

If you become eligible partway through the year, the last-month rule lets you contribute the full annual amount as long as you’re eligible on December 1. You then have to stay eligible through the end of the following year; if you don’t, the extra contributions are added to your income and hit with a 10% additional tax. Exceeding the limit triggers a 6% excise tax for each year the excess stays in the account.

HSA Eligibility Requirements

You must be covered by a qualifying HDHP. For 2026, that means a plan with:

You also cannot:

• Be enrolled in Medicare
• Be claimed as a dependent on someone else’s return
• Have other disqualifying coverage, such as a general-purpose health FSA, including one through your spouse

You can still contribute if you have a limited-purpose FSA covering only dental and vision.

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, widened eligibility. Starting in 2026, bronze and catastrophic plans available as individual coverage through an ACA (Affordable Care Act) marketplace count as HSA-compatible even if they don’t meet the deductible and out-of-pocket tests above. Enrolling in a direct primary care arrangement no longer disqualifies you, provided the fees total no more than $150 a month ($300 for an arrangement covering more than one person). And a plan can cover telehealth before the deductible without breaking HSA eligibility, a rule that is now permanent.

Medicare enrollment ends contributions. If you enroll mid-year, your contribution limit is prorated by the months you were eligible. Enrolling in Medicare Part A is also retroactive up to six months when you claim Social Security after 65, which can create excess contributions you have to unwind. Anyone working past 65 with an HSA should map this out before claiming benefits.

HSA Qualified Medical Expenses

Qualified expenses follow the IRS definition of medical care in Publication 502: deductibles, copays, prescriptions, dental and vision care, and many other costs of diagnosing or treating illness. Insurance premiums generally don’t qualify, with exceptions for COBRA, qualified long-term care insurance premiums up to age-based annual limits, health coverage while receiving unemployment compensation, and Medicare premiums after 65 (not Medigap or other Medicare supplement policies). Starting in 2026, direct primary care fees can also be paid from an HSA.

Using an HSA as a Retirement Account

There is no deadline to reimburse yourself. You can pay a medical expense out of pocket today, keep the receipt, leave the money invested for twenty years, and reimburse yourself tax-free later. Nothing requires you to withdraw in the year the expense occurred, as long as the expense came after you opened the account. In effect this converts an HSA into a Roth-like account with a paper trail.

After age 65, non-medical withdrawals are permitted and taxed as ordinary income with no penalty, which makes an HSA behave like a traditional IRA at worst. Before 65, non-qualified withdrawals are taxed and carry a 20% penalty.

HSAs also have no required minimum distributions, unlike traditional IRAs and 401(k)s, so the balance can compound for as long as you like.

If your cash flow allows, paying current medical costs out of pocket and leaving the HSA invested can produce a larger tax-free balance later. Many providers allow investment above a small cash minimum, and an HSA left in cash for decades gives up most of the tax-free growth.

In a ProjectionLab plan, you can pay health expenses from your HSA by setting the expense’s payment method to that specific account.

HSA vs. FSA

An FSA forces you to spend within the plan year; an HSA balance is yours permanently and can be invested.

Frequently Asked Questions

Who qualifies for an HSA? Anyone covered by a qualifying high-deductible health plan, or from 2026 a bronze or catastrophic marketplace plan, who is not on Medicare, not claimed as a dependent, and has no other disqualifying coverage such as a general-purpose FSA.

What can I spend HSA money on? Qualified medical expenses including deductibles, copays, prescriptions, dental, and vision. Insurance premiums generally do not qualify, with exceptions for COBRA, qualified long-term care premiums up to age-based annual limits, coverage while receiving unemployment compensation, and Medicare premiums after 65 (not Medigap or other Medicare supplement policies).

What happens to my HSA when I turn 65? Contributions must stop once you enroll in Medicare, but the balance stays yours. Qualified medical withdrawals remain tax-free, and non-medical withdrawals become penalty-free while still taxed as income.

What happens to my HSA if I change jobs? Nothing. The account is yours, not your employer’s. You can keep contributing as long as you remain covered by a qualifying HDHP.

Should I use my HSA now or save the receipts? Saving the receipts works only if you can document each expense when you finally reimburse yourself. Keep records showing the expense was incurred after the HSA was established, that it wasn’t paid or reimbursed from another source such as insurance or an FSA, and that you didn’t also claim it as an itemized deduction. IRS Publication 969 says to keep these with your tax records rather than filing them with your return.