What is an HSA and How Does it Work?

A health savings account, or HSA, is a tax-advantaged account that helps you save and pay for qualified medical expenses. HSAs offer several tax benefits, and the money in your account can roll over from year to year, helping you save for healthcare costs now or in the future.

To contribute to an HSA, you generally need to be covered by an HSA-eligible high-deductible health plan and meet other eligibility requirements. Below, we’ll explain how HSAs work, who qualifies, what you can use HSA funds for, and how an HSA compares with an FSA.

What is a Health Savings Account?

A health savings account, or HSA, is a tax-advantaged account that lets you set aside money to pay for qualified medical expenses. Think of it as a dedicated savings bucket for healthcare costs, such as doctor visits, prescriptions, dental care, and other eligible expenses.

Unlike a regular savings account, an HSA offers federal tax advantages when you contribute, while your money is in the account, and when you use it for qualified medical expenses.

Another important feature is that the HSA belongs to you. The money in your account can roll over from year to year, and if you change jobs, switch health plans, or retire, the money already in your HSA stays with you.

Who is eligible to contribute to an HSA?

To contribute to an HSA, you generally need to meet certain IRS requirements. These include:

• Having HSA-eligible health coverage. This generally means being covered by a qualifying high-deductible health plan. Beginning in 2026, certain bronze and catastrophic individual health plans are also treated as HSA-compatible under federal rules.
• Having no disqualifying health coverage. Certain additional coverage, such as dental, vision, disability, and long-term care coverage, is allowed.
• Not being enrolled in Medicare.
• Not being eligible to be claimed as someone else’s dependent.

For traditional HSA-eligible HDHPs, the minimum annual deductible is $1,700 for self-only coverage and $3,400 for family coverage in 2026. For 2027, those amounts increase to $1,750 and $3,500.

Not sure whether your plan qualifies? Check your plan documents or ask your insurance provider or employer’s benefits team whether your coverage is HSA-eligible.

How does an HSA work?

Once you have an HSA, the basics are fairly straightforward. You can put money into the account, use it for qualified medical expenses, and keep any unused funds for the future.

• Contributions: Money can come from you, your employer, or both. If you contribute through an employer’s cafeteria plan, those contributions are generally made on a pre-tax basis. If you contribute on your own, your eligible contributions are generally tax-deductible, even if you don’t itemize deductions.
• Withdrawals: You can take money from your HSA tax-free to pay or reimburse yourself for qualified medical expenses incurred after the HSA was established. Depending on your HSA provider, you may be able to pay directly from the account or pay out of pocket and reimburse yourself later.
• Rollover: Money you don’t use stays in your HSA and carries over from year to year. Unlike an FSA, an HSA does not have a “use it or lose it” rule. Some FSAs may allow a limited carryover or grace period, depending on the plan.
• Investing: Depending on your HSA provider, you may have the option to invest some of your balance. Investment options, fees, and minimum balance requirements vary by provider. Any earnings within the HSA are generally tax-free while they remain in the account.

What are the HSA contribution limits?

The IRS limits how much can be contributed to an HSA each year. These limits can change from year to year, so it’s worth checking the current amount before making contributions.

If you’re 55 or older at the end of the tax year, you may be able to contribute an additional $1,000.

Keep in mind that the annual limit generally includes contributions from all sources, including money you contribute and contributions from your employer. If you’re contributing from more than one source, keeping track of the total can help you avoid exceeding your annual limit.

What can you use HSA funds for?

HSA funds can cover a wide range of healthcare costs. The IRS refers to these as “qualified medical expenses.” Common examples include:

• Doctor visits, hospital care, and lab work
• Prescription medications
• Dental care, including cleanings, fillings, and braces
• Vision care, including eye exams, glasses, and contact lenses
• Mental health care
• Medical equipment and supplies, such as crutches and hearing aids
• Many over-the-counter medications and certain healthcare products

Not every healthcare-related purchase qualifies. Expenses for general health or personal use, such as most cosmetic procedures and general fitness expenses, typically aren’t eligible. Most health insurance premiums also aren’t qualified HSA expenses, although there are some exceptions.

If you use HSA funds for a non-qualified expense, you’ll generally owe income tax on that amount. If the distribution is made before you turn 65, you may also owe an additional 20% tax.

Tip:

Keep receipts and other records for expenses you pay or reimburse with your HSA. The IRS requires you to be able to show that HSA distributions were used for qualified medical expenses and weren’t reimbursed from another source.

HSA vs. FSA: What’s the difference?

Health savings accounts and flexible spending accounts can both help you set aside money for healthcare expenses, but they work differently. Here’s a quick look at some of the key differences.

One of the biggest differences is what happens to money you don’t spend. With an HSA, unused funds remain in your account and continue to roll over from year to year. With an FSA, you may need to use your funds within the plan’s timeframe or risk losing them. Some employers offer a limited carryover or grace period, so check the details of your plan.

In some cases, you can have an HSA and a limited-purpose FSA at the same time. A limited-purpose FSA generally reimburses eligible dental and vision expenses. This can help you cover those expenses while leaving more money in your HSA for other qualified medical expenses or future healthcare costs.

What are the tax benefits of an HSA?

One of the biggest benefits of an HSA is its three federal tax advantages, often called the “triple tax advantage.” Here’s how they work:

• Tax benefits on contributions: Contributions you make to your HSA are generally tax-deductible, even if you don’t itemize deductions. Contributions made by your employer, including certain contributions made through a cafeteria plan, may be excluded from your taxable income.
• Tax-free growth: Interest and other earnings in the account aren’t taxed while they remain in the HSA. If your HSA offers investment options, this can help your balance grow over time.
• Tax-free withdrawals: You generally won’t owe federal income tax when you use HSA funds for qualified medical expenses. You can also reimburse yourself later for an eligible expense you paid out of pocket if the expense was incurred after your HSA was established and you keep the appropriate records.

Once you turn 65, you can also withdraw HSA funds for non-qualified expenses without the additional 20% tax. You’ll still owe income tax on withdrawals that aren’t used for qualified medical expenses.

Can you use an HSA for retirement?

Yes. Because HSA funds roll over from year to year and the account stays with you, an HSA can also help you prepare for healthcare expenses in retirement.

You can use HSA funds tax-free for qualified medical expenses, including many costs you may face later in life. After age 65, certain Medicare premiums can also qualify, along with other eligible healthcare expenses.

If saving for future healthcare costs fits your budget, you might consider:

• Paying current medical expenses out of pocket and leaving more money in your HSA for future qualified expenses.
• Investing some of your HSA balance if your provider offers that option and it fits your financial goals.
• Keeping receipts for qualified medical expenses you pay out of pocket. You may be able to reimburse yourself from your HSA later, if the expense was incurred after the HSA was established and you have the records to support it.

You don’t have to choose between using an HSA today and saving it all for the future. The right approach depends on your healthcare needs, budget, and financial goals.

Ready to learn more about HSAs?

An HSA can help you manage healthcare expenses today while giving you the option to save for future costs. The key is understanding the eligibility requirements, tax benefits, contribution limits, and qualified expenses before deciding how an HSA fits into your financial plans.

If you’re considering an HSA, Forward Bank is here to help. Our local team can answer your questions and help you understand your options so you can make a choice that works for you.

Next Steps

• Check your eligibility. Review your health plan to confirm that it’s HSA-eligible and that you meet the other requirements to contribute.
• Think about how you’ll use your HSA. Consider your expected healthcare expenses, how much you can comfortably contribute, and whether you want to save some of your balance for future costs.
• Explore your HSA options. Compare fees, account features, access to your money, and investment options if available.