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Key points

  • An HSA is a savings account for health expenses that offers tax advantages.
  • Only people covered by high-deductible health plans can contribute.
  • To enjoy the full tax benefits, you must spend the money on qualified medical expenses.

A health savings account is used for short-term medical expenses, tax optimization and long-term investing. It offers a triple tax advantage and can even be used for retirement savings.

But with the powerful tax benefits come strict HSA rules. The federal government limits who can open an HSA. It also limits how much you can contribute, what you can use the money for and more.

What is an HSA?

An HSA is a tax-advantaged account that helps you save for health expenses. It has what’s known as a triple tax advantage:

  1. Your contributions are tax-deductible or pretax.
  2. You can invest your contributions and enjoy tax-free growth.
  3. Your distributions for qualified medical expenses are tax-free.

HSAs were created in 2004 with the Medicare Prescription Drug, Improvement and Modernization Act. They were meant to make health care more accessible and affordable.

A guide to HSA rules

You must abide by strict rules regarding eligibility, contributions and withdrawals to benefit from an HSA. 

As mentioned, only people with HDHPs can open and contribute to an HSA. The amount you can contribute each year is capped. The IRS also limits the expenses you can use your HSA funds for if you want to reap the full tax benefits and avoid penalties.

Who is eligible to open an HSA?

Not everyone can open and contribute to an HSA. You must meet the following requirements:

  • You’re covered under a high-deductible health plan.
  • You have no other health coverage, with some exceptions.
  • You aren’t enrolled in Medicare.
  • You can’t be claimed as a dependent on someone else’s tax return.

Tip: You can open an HSA with a third party if you meet the requirements. This can be an option if your employer doesn’t offer one.

What is a high-deductible health plan?

You must participate in a high-deductible health plan to contribute to an HSA. For 2024, this means:

  • An annual deductible of $1,600 or more for individual coverage and $3,200 or more for family coverage.
  • An out-of-pocket maximum that doesn’t exceed $8,050 for individual coverage and $16,100 for family coverage.

The HSA, with its powerful tax advantages, is limited to those who really need it. It’s a tool for dealing with potentially higher medical costs.

Eligible HSA expenses

HSAs have serious tax benefits. But you must use the funds for qualified medical expenses to take advantage fully. The IRS defines qualified medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.”

“The list of qualified medical expenses is pretty wide,” said Meagan Dow, a certified financial planner and senior strategist for client needs research at Edward Jones.

As you might expect, it includes copays and deductibles for doctor and hospital visits. It also has dental expenses, vision expenses and prescriptions. But it also includes items that may surprise you, such as contact lens solution and bandages. 

Tip: Always confirm that an expense is HSA-eligible before using your funds to pay for it. 

Here are examples of qualified medical expenses provided by the IRS:

  • Abortion.
  • Acupuncture.
  • Ambulance.
  • Artificial limb.
  • Artificial teeth.
  • Bandages.
  • Birth control pills.
  • Body scan.
  • Braille books and magazines.
  • Breast pumps and supplies.
  • Breast reconstruction surgery.
  • Car improvements to accommodate an ailment, disease or disability.
  • Chiropractor.
  • Christian Science practitioner.
  • Contact lenses.
  • Crutches.
  • Dental care.
  • Diagnostic devices. 
  • Disabled dependent care.
  • Eye exam.
  • Eyeglasses.
  • Eye surgery.
  • Fertility enhancement.
  • Guide dog or other service animal.
  • Health institute.
  • Health maintenance organization.
  • Hearing aids.
  • Home care.
  • Home improvements to accommodate an ailment, disease or disability.
  • Hospital services.
  • Laboratory fees.
  • Lead-based paint removal.
  • Legal fees necessary to authorize treatment of mental illness.
  • Lifetime care advance payments.
  • Lodging at a hospital or similar institution if principal reason for visit is medical care.
  • Long-term care.
  • Meals at a hospital or similar institution if principal reason for visit is medical care.
  • Medical conferences if attendance is primarily for and necessary to the medical care of you, a spouse or a dependent.
  • Medical information plan.
  • Medicines.
  • Nursing home.
  • Operations.
  • Optometrist.
  • Osteopath.
  • Oxygen.
  • Physical examination.
  • Pregnancy test kit.
  • Prosthesis.
  • Psychiatric care.
  • Psychoanalysis.
  • Psychologist.
  • Special education.
  • Special home for intellectually and developmentally disabled.
  • Sterilization.
  • Stop-smoking programs.
  • Telephone equipment to accommodate users who are deaf, are hard of hearing or have a speech disability.
  • Television equipment that displays the audio part of television programs as subtitles for a person with a hearing disability.
  • Therapy.
  • Transplants.
  • Transportation primarily for and essential to medical care.
  • Treatment of alcoholism.
  • Treatment of drug addiction.
  • Trips primarily for and essential to medical care.
  • Weight loss program if it is a treatment for a specific disease diagnosed by a physician.
  • Wheelchair.
  • Wig purchased on advice of physician.
  • X-ray.

Noneligible HSA expenses

According to the IRS, HSAs don’t cover expenses that are “merely beneficial to general health” and don’t primarily “alleviate or prevent a physical or mental disability or illness.” Vitamins, for example, aren’t considered eligible medical expenses. Nor are most health care premiums.

“There are some exceptions like COBRA premiums and premiums for Medicare Parts A, B, C and D once you turn 65. But generally your premiums for health insurance, including Medigap premiums, aren’t eligible,” Dow said.

Here are some other expenses that aren’t HSA-eligible:

  • Child care.
  • Controlled substances.
  • Cosmetic surgery (except that which meaningfully promotes the proper function of the body or prevents or treats illness or disease).
  • Dancing lessons.
  • Diaper service.
  • Electrolysis.
  • Funeral expenses.
  • Future medical care.
  • Health club dues.
  • Household help.
  • Illegal medical care.
  • Maternity clothes.
  • Medicines imported illegally.
  • Nonprescription drugs.
  • Nutritional supplements.
  • Personal use items.
  • Swimming lessons.
  • Teeth whitening.
  • Veterinary fees.

HSA contribution rules

Like many other tax-advantaged accounts, HSAs limit how much you can contribute each year. The contribution limits for 2024 are:

  • $4,150 for individual coverage.
  • $8,300 for family coverage.

Tip: You can contribute an additional $1,000 per year if you’re 55 or older.

You can make pretax payroll contributions to your HSA or deduct your after-tax manual contributions when you file your taxes. Either way, your contributions reduce your taxable income for the year.

Your employer can also contribute to your HSA. But remember that the limit applies to all contributions. This means employer contributions reduce the amount an employee can contribute. Once an employer makes a contribution, it belongs to the employee.

“The contribution from the employer is the employee’s,” said Theresa Rockwell, a member partner advisor at AmeriCU Credit Union. “The employer cannot take it back if it goes unused or if the employment terminates. The funds are owned by the account holder.”

HSA withdrawal rules

You can receive tax-free HSA distributions to pay for qualified medical expenses, as defined by the IRS.

“It is always important to double-check that the expense is qualified,” Rockwell said. “There are consequences for using the HSA funds for nonqualified expenses.”

Prior to age 65, distributions for nonqualified expenses are subject to income taxes and a 20% penalty.

Example: Say you have a marginal tax rate of 22% and spend $1,000 on nonqualified expenses. You’ll owe 22% in income taxes on the distribution, or $220. You’ll also owe the 20% penalty, or $200. That’s $420 of your $1,000 owed in taxes.

Once you turn 65, you can take penalty-free withdrawals from your HSA for any reason. Nonqualified distributions will be taxed at ordinary income rates.

HSA reimbursement rules

There are a few ways to pay for expenses directly with your HSA funds:

  • HSA debit card.
  • Checks.
  • Online payments.

If you pay for an HSA-eligible expense out of pocket, you can reimburse yourself later. The reimbursement process varies depending on your HSA administrator. You typically don’t have to provide receipts or other documentation. But you should maintain those records in case of an IRS audit.

Frequently asked questions (FAQs)

An HSA is a considerable advantage. But an HDHP often is not. Depending on your health care needs, a high deductible can be very costly. You might not be able to recoup those expenses through the benefits of an HSA.

Yes, an HSA can function as a retirement account. In fact, it’s more flexible than an IRA or 401(k) in some ways. You can make withdrawals for any reason without penalty once you turn 65. You just need to pay income tax. That’s essentially how a traditional 401(k) or IRA works.

HSAs also have the added benefit of untaxed withdrawals for qualified medical expenses.

Yes, dental care is included on the IRS list of qualified medical expenses.

No, you generally can’t use your HSA to pay for a gym or health club membership.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Erin Gobler

BLUEPRINT

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Her passion for teaching others about personal finance came from her own experience of learning to manage her money in a better way. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Joel Anderson

BLUEPRINT

Joel Anderson is a business writer who has been living and working in Los Angeles for over a decade. His work has appeared on sites like MSN.com, GoBankingRates and Equities.com, writing about subjects ranging from basic investing knowledge to tech start-ups. He’s focused on spreading financial literacy with his work, helping more people learn how to make their money work for them.

Hannah Alberstadt is the deputy editor of investing and retirement at 91Ӱ Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.