What Is a Health Savings Account? (HSA) – Everything You Need To Know

Updated on: January 10th, 2021

Reviewed by Frank Lalli

We want to help you make informed healthcare decisions. We follow strict editorial standards. This post may contain links to lead generation forms, which is how we make money. But this won’t influence our writing.

Unexpected medical expenses can set you back for years, particularly if you have a high-deductible health plan (HDHP) that requires you to pay for much of your care out-of-pocket. For example, the average HDHP deductible in 2020 for an individual was $2,349 and for a family was $4,601.1  With a health savings account (HSA), you can at least get a tax advantage on some of the money you are shelling out.  

An HSA is a savings account geared specifically for medical expenses. You fund it with pre-tax contributions2 which allows you to lower your overall tax bill by setting aside pre-tax money for healthcare costs.3 

If You’re Considering Opening up an HSA:

Make sure you qualify — there are a number of criteria you must meet. For example, you must have a HDHP, and you can’t be enrolled in Medicare.4

Know the contribution limits — each year, the Internal Revenue Service (IRS) determines how much can be set aside in an HSA5 For 2021, you can contribute up to $3,600 for self-only coverage and up to $7,200 for family coverage.6

Understand what benefits are covered — while money in your HSA account can be used to pay for such things as doctor visits and prescriptions, you generally can’t use it  to pay certain costs such as health insurance premiums.7

Who Qualifies for an HSA? 

While an HSA can be beneficial from a tax standpoint, not everyone qualifies to contribute to one. 

In order to open an HSA and contribute to it, you first must have a high-deductible health plan.8

The IRS defines HDHPs as those with a higher deductible than typical health plans and a maximum limit on the amount you are expected to pay in out-of-pocket costs.9 

In 2020, the minimum annual deductible for a plan to be considered an HDHP was $1,400 for individual coverage and $2,800 for family coverage. Likewise, the maximum annual out-of-pocket expenses including deductibles for an HDHP in 2020 was $6,900 for individual coverage and $13,800 for family coverage.10  Premiums are not included in out-of-pocket expenses.11

For 2021, the minimum annual deductible remains the same. However, out-of-pocket expenses can’t exceed $7,000 for individual coverage and $14,000 for family coverage.12 

Another requirement for opening an HSA is that you have no other health coverage outside of the HDHP. However, if your spouse has coverage under a non-HDHP policy, you may still be eligible to open an HSA as long as you don’t have coverage under your spouse’s plan.13     

Finally, in order to qualify for an HSA, you can’t be enrolled in Medicare or be claimed as a dependent on someone else’s tax return.14  

Did You Know?

An HSA allows you to use pre-tax contributions to lower your overall tax bill by setting aside money for certain healthcare costs.

How Does an HSA Work?

Once you open your HSA, you can make regular tax-free deposits directly from your paycheck at work to the account, for example. Those deposits even earn tax-free interest, which increases your balance.15 

How Much Can You contribute to an HSA?  

The IRS sets limits each year on how much money you can contribute to an HSA. In 2020, you can contribute a maximum of $3,550 if you only have coverage under an HDHP for yourself. If your family is covered under an HDHP, you can contribute up to $7,100.16

For 2021, you can contribute up to $3,600 for yourself and up to $7,200 for family coverage.17

If you are 55 or over, the IRS allows you to make a catchup contribution of an additional $1,000 per year to your HSA.18

How Can You Use Your HSA money?

Before you sign up for an HDHP and a HSA, it’s important to know what types of medical expenses you can pay with your HSA money. 

Typically, you can pay for doctor visits, medical equipment and prescriptions.19  Other medical expenses that are eligible include dental and vision expenses. 20

Of particular interest to women: Menstrual care and feminine hygiene products can now be purchased from funds in an HSA account due to a change that went into effect as part of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. Over-the-counter (OTC) products and medications that don’t require a prescription are also covered, such as cold medications and anti-inflammatory drugs.21

However, you can’t use HSA funds for such OTC drugstore products as nail clippers and pumice stones.22

Other examples of products and services that may be covered include psychiatric care, X-rays,  some hearing aids, physical therapy, and diabetes supplies.23

Did You Know?

The IRS determines who qualifies to contribute to an HSA and sets limits each year on how much money can be contributed to an HSA.

What Are the Benefits of HSAs?

There are a number of advantages to opening an HSA if you qualify:

  • You can receive tax advantages just by setting aside pre-tax money for medical expenses that you will eventually need.24 If you make $75,000 per year and sock away $3,000 in an HSA, you reduce your taxable income to $72,000. 
  • HSAs cover a wide range of medical products and services. 
  • Others can contribute to your HSA, such as family members or even your employer. If your employer does make a contribution — usually $500 to $1,000 — that money does not count as income.25   
  • You can carry the funds over from year to year. If you don’t spend all of the money in your HSA this year, you can use it at a later time.26 That in theory allows you to build a sizable balance that’s available as you grow older.
  • The funds in your HSA can be invested. The money you put in your HSA can be invested in mutual funds and stocks. Any earnings you make would be tax-free.27 
  • You can use the funds for non-medical expenses, but at a cost. If you have an emergency, you can use the funds in your HSA for non-medical expenses. However, you will be taxed on the withdrawal. And if you are under 65, you may be assessed a 20% penalty.28

What Are the Drawbacks of HSAs 

Before you open an HSA, make sure you also understand the potential drawbacks:

  • You can’t use the money for insurance premiums. Since premiums don’t fall under the category of out-of-pocket expenses, you can’t tap your HSA account to pay them.29
  • You have to be disciplined enough to make regular contributions. If you don’t add money regularly to your account, you may not have the funds you need when medical costs arise.
  • You can’t predict how much you will need. One year you may rack up a lot in medical costs, while another year you may not. Depending on how much you save, your HSA account may not cover everything you’ll need.
  • You must open an HDHP in order to use one, which means you will have higher out-of-pocket costs than some other health plans. 

What’s the Difference Between an HSA, HRA, and FSA?

As you are researching HSAs, you may also come across the terms “HRA” and “FSA.”. 

A Health Reimbursement Arrangement (HRA) is a type of account that is owned and controlled by your employer. Your employer offers it as a benefit, and is the only one who makes contributions. Since your employer owns the account, they determine what medical expenses you can use the money for and when you are eligible to use the money.30 

HRAs are ideal for employees who want to cut down on their health expenses and make the most of company benefits. However, sometimes they are offered in lieu of a more full-featured health insurance plan. Also, since it is a company benefit, you would lose the money in your account if you change jobs. 

A Flexible Spending Account (FSA) is an account also owned and controlled by your employer. However, you can make tax-free contributions along with your employer.31  Unlike with HSAs, you typically can’t roll over more than $500 in funds from year to year.32  Also, you don’t need to have an HDHP in order to benefit from or contribute to an FSA.33 FSAs may work best for employees who want to save for medical expenses and avoid having a high-deductible plan.

For those who can afford the high deductibles of an HDHP and want full control of the money they set aside for healthcare — as well as the ability to roll money over from year to year — an HSA is likely the way to go. 

Next Steps

Only you can decide whether it makes more sense for you to have an HDHP and HSA or a health insurance plan with a lower deductible. Since HDHPs tend to have lower premiums than other health insurance plans,34 you can deposit some of the money you save on premiums in your HSA.

However, make sure you have the self-discipline to make regular contributions to an HSA, or you may find yourself without the funds for healthcare costs when you need them. 



Share this article

  1. Kaiser Family Foundation. “2020 Employer Health Benefits Survey.” kff.org, October 8, 2020 (accessed November 4, 2020).

  2. U.S. Government Website for the Federal Health Insurance Marketplace.  “Health Savings Account (HSA) – HealthCare.gov Glossary.” healthcare.gov (accessed October 22, 2020).

  3. H&R Block. “How does a health savings account (HSA) affect my taxes?” hrblock.com (accessed October 22, 2020).

  4. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.” irs.gov, February 18, 2020  (accessed October 22, 2020).

  5. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  6. Internal Revenue Service. “26 CFR 601.602: Tax forms and instructions.” irs.gov (accessed November 6, 2020).

  7. U.S. Government Website for the Federal Health Insurance Marketplace.  “Health Savings Account (HSA) – HealthCare.gov Glossary.”

  8. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  9. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  10. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  11. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  12. Internal Revenue Service. “ 26 CFR 601.602: Tax forms and instructions.”

  13. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  14. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  15. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  16. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  17. Internal Revenue Service. “ 26 CFR 601.602: Tax forms and instructions.”

  18. Internal Revenue Service. “HSA Contribution Limits.” irs.gov (accessed October 22, 2020).

  19. Bank of America. “What expenses are covered?” bankofamerica.com (accessed October 22, 2020).

  20. Cigna. “Which Expenses are Eligible for HAS, FSA and HRA Reimbursement?” cigna.com (accessed October 22, 2020).

  21. Washington State Health Care Authority. “The CARES Act affects your Medical FSA or HSA Funds.” hwc.wa.gov, April 20, 2020 (accessed November 4, 2020);  Internal Revenue Service. “IRS outlines changes to health care spending available under CARES Act.” irs.gov, June 17, 2020 (accessed October 22, 2020).

  22. Cigna. “Which Expenses are Eligible for HSA, FSA and HRA Reimbursement?” cigna.com (accessed November 4, 2020).

  23. Bank of America. “What expenses are covered?

  24. H&R Block. “How does a health savings account (HSA) affect my taxes?

  25. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  26. U.S. Government Web site for the Federal Health Insurance Marketplace.  “Health Savings Account (HSA) – HealthCare.gov Glossary.”

  27. Bank of America. “Investing FAQ.” bankofamerica.com (accessed October 22, 2020).

  28. Stephen Sellner. “4 Health Savings Account Benefits That Could Help in Retirement.” citizensbank.com (accessed October 22, 2020).

  29. Internal Revenue Service. “Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans.”

  30. Blue Cross Blue Shield Blue Care Network of Michigan. “What’s an HRA and how do I use it?” bcbsm.com (accessed on October 22, 2020).

  31. Blue Cross Blue Shield Blue Care Network of Michigan. “What are the Differences Between HSAs, HRAs and FSAs?” bcbsm.com (accessed on October 22, 2020).

  32. U.S. Department of the Treasury. “Treasury Modifies ‘Use-Or-Lose’ Rule For Health Flexible Spending Arrangements.” treasury.gov (accessed October 22, 2020).

  33. Blue Cross Blue Shield Blue Care Network of Michigan. “What are the Differences Between HSAs, HRAs and FSAs?”