Sorting through health insurance choices when you start a new position or during open enrollment can feel overwhelming. The barrage of acronyms and terms doesn’t make it any easier.
For example, if your PPO is actually an HDHP, you could be eligible to open an HSA and set aside money for medical costs. Confusing, right?
We’ll break down some of that insurance jargon and outline the perks, rules and subtleties of health savings accounts so you can pick the best option for you and your household.
What Is an HSA?
An HSA, or health savings account, is not the same as a typical savings account. It’s a tax-favored account that you and potentially your employer can fund to cover qualifying medical expenses using pre-tax dollars.
You can spend HSA dollars to pay for medical costs as they come up. Alternatively, you can let the funds in your HSA accumulate by investing them.
There are several financial advantages to owning an HSA, which we’ll cover in a bit. First, it helps to understand how to open one.
Need Quick Cash for What an HSA Won’t Cover?
An HSA is a useful way to handle health care expenses, but it may not meet every medical cost you face. If you’re worried about covering all your medical bills, our roundup of easy ways to earn fast money could be helpful.
How Do You Open a Health Savings Account (HSA)?
The first requirement for contributing to an HSA is enrollment in a high-deductible health plan (HDHP).
With HDHPs, premiums are typically lower, but you must meet a sizable annual deductible before insurance begins paying.
You can’t open an HSA with just any plan that has a high deductible. For 2025, the deductible must be at least $1,650 for an individual or $3,300 for a family for a plan to qualify as an HDHP.
Additionally, to be eligible to open and contribute to an HSA, you cannot be enrolled in Medicare, have other disqualifying health coverage or be claimed as someone else’s dependent on their tax return.
If you satisfy those requirements, you can open an HSA — even if your employer doesn’t provide one.
Banks, insurers and other approved HSA custodians offer these accounts. Your insurer might partner with a financial institution where you can establish your HSA.
HSA Contribution Limits
Like other tax-advantaged accounts such as 401(k)s and IRAs, the IRS caps how much you can put into an HSA annually.
For 2025, the limit is $4,300 for individuals and $8,550 for families. Those 55 and older may add a $1,000 catch-up contribution. Employer contributions count toward these caps.
Unused HSA balances carry over year to year. The funds remain yours if you change plans, switch jobs or retire.
For details on yearly limits and rules, see the resources on hsa contribution limits.
HSA Qualified Medical Expenses
Withdrawals from your HSA for qualified medical expenses are tax-free.
The IRS provides an extensive list of qualifying costs, which includes but isn’t limited to:
- Deductibles
- Co-payments
- Prescription drugs
- Over-the-counter medicines
- Dental procedures
- Eyewear
- Chiropractic services
- Breastfeeding supplies
- Menstrual care items
- Birth control pills
You’ll often receive a debit card or checks tied to your HSA. In some scenarios, you’ll pay upfront and request reimbursement later.
Keep receipts, explanation of benefits forms or other documentation when you use HSA funds.
“You don’t need to send documentation to your HSA provider,” said Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute. “The IRS expects you to have documentation, and you’ll need it if you’re audited.”
The Advantages of an HSA
An HSA lets you save for medical expenses without paying tax on that money.
If your employer offers payroll contributions, a portion of your paycheck can go into the HSA before taxes are withheld. If you contribute with after-tax income, you can claim a deduction on your tax return for those contributions.
“Contributing through payroll saves you not only federal and state income taxes, but also FICA taxes,” Fronstin noted.
You also won’t be taxed when withdrawing HSA funds for qualified medical costs.
Another perk is that earnings on interest or investments in your HSA grow tax-free.
“When you open an HSA, the money sits in a bank and earns interest like any account,” Fronstin said. “Interest rates may be modest, but once your balance reaches a threshold, your HSA provider will likely allow you to invest in mutual funds.”
Beyond those tax benefits, employers — and even other people — can contribute to your HSA, which is akin to getting extra money added to your account.
The Downsides of HSAs
One downside is potential account maintenance fees. Also, if you withdraw money for nonqualified expenses before age 65, you’ll owe income tax on the distribution plus a 20% penalty.
Once you’re 65, you can use HSA funds for nonmedical purposes without the penalty, but those withdrawals will be taxed as ordinary income.
Some challenges relate more to the high-deductible plans tied to HSAs. Choosing the best health plan for you and your family is a personal call, and HDHPs aren’t the right fit for everyone, Fronstin said.
People who can’t cover costs out of pocket until they meet their deductible might delay or skip care.
Critics argue HDHPs mainly benefit young, healthy people who rarely need medical services. Routine preventive care is often covered without meeting the deductible, but those with ongoing health issues could face significant outlays before insurance coverage kicks in.
In 2019, federal changes expanded preventive care to include 14 items related to chronic conditions such as diabetes and heart disease. For the most current guidance on whether an HSA is right for you, consult the latest IRS HSA publications.
“These adjustments made plans a bit more accommodating for those with chronic illnesses,” Fronstin said.
HSAs vs. FSAs vs. HRAs
HSAs aren’t the only tax-advantaged health savings options. Flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) are alternatives.
An FSA lets you set aside pre-tax dollars for eligible medical expenses, but unlike an HSA, your employer owns the FSA. If you leave your job, you typically lose remaining FSA funds. FSAs also usually require you to use the money within the plan year, and rollover rules and contribution limits differ.
A benefit of FSAs is that you don’t need an HDHP to participate — they can be paired with any health plan.
An HRA is an employer-funded plan; only your employer can add money to it.
If your employer provides an HRA, you can get tax-free reimbursements for qualified medical expenses. These reimbursements do not need to be reported as income.
All three vehicles can reduce out-of-pocket health care costs. Talk with your employer’s HR team to learn what your workplace offers so you can make the best decision for your circumstances.
Alex Rivers is a former senior writer at Savinly.
