HSA Explained: What It Is, Who Qualifies, and How It Works

A health savings account (HSA) is a special savings account for medical costs. It comes with tax breaks that few other accounts have. But not everyone can open one. Here's how it works.

What is an HSA?

The IRS describes an HSA as a tax-exempt account you set up with a qualified trustee (like a bank or insurance company) to pay or reimburse certain medical expenses. HealthCare.gov adds that you can use it for things like deductibles, copayments, and coinsurance.

The tax breaks

According to IRS Publication 969:

• Money in: You can deduct contributions you make, even if you don't itemize. Contributions your employer makes (including through payroll at work) can be left out of your income.
• Money grows: Interest and other earnings in the account are tax free.
• Money out: Withdrawals used for qualified medical expenses aren't taxed.

It's yours to keep

Two features make HSAs stand out, per the IRS:

• Money rolls over. Amounts left at the end of the year generally carry over to the next year. There's no "use it or lose it."
• It's portable. The HSA stays with you if you change jobs or stop working.

Who qualifies?

IRS Publication 969 says you must meet all of these to contribute:

1. You're covered by a high deductible health plan (HDHP) on the first day of the month.
2. You have no other health coverage, except certain types the IRS allows (like dental, vision, disability, accident, long-term care, and telehealth coverage).
3. You're not enrolled in Medicare.
4. No one can claim you as a dependent on their tax return.

A common trap: If you (or your spouse) have a regular, general-purpose health FSA that can pay your medical bills, you generally can't contribute to an HSA. A limited-purpose FSA (for things like dental and vision) is allowed. (See HSA vs FSA.)

New in 2026: The IRS says that starting January 1, 2026, bronze and catastrophic plans are treated as HSA-compatible, even if they don't meet the usual HDHP definition, and they don't have to be bought through an exchange. Also starting in 2026, people in certain direct primary care arrangements can still contribute to an HSA.

How much can you put in?

• 2027 amounts are from IRS Revenue Procedure 2026-24.
• 2026 amounts and the $1,000 age-55 "catch-up" are from IRS Publication 969. (Publication 969 describes the $1,000 extra amount for people 55 or older by the end of the tax year. If you are near 55, confirm the rule for your year with the IRS or your HSA provider.)

Important: The limit includes money your employer puts in. If your employer adds $1,000 to your self-only HSA in 2027, you can add up to $3,500 more yourself.

If you're married and both spouses are eligible, each spouse needs their own HSA. The IRS says you can't have a joint HSA.

What can you spend it on?

"Qualified medical expenses" generally include things like deductibles, copays, coinsurance, and prescriptions. HealthCare.gov notes HSA money generally can't pay health insurance premiums. The IRS lists a few exceptions, such as COBRA coverage, coverage while getting unemployment benefits, long-term care insurance (within limits), and Medicare premiums if you're 65 or older (but not Medigap).

Keep your receipts. The IRS says you must keep records showing your withdrawals were for qualified medical expenses.

What if I use it for something else?

If you take money out for non-medical things, it gets added to your taxable income. The IRS says you may also owe an extra 20% tax. That extra 20% doesn't apply after you become disabled, reach age 65, or die. (Regular income tax still applies to non-medical withdrawals.)

What happens when I get Medicare?

Starting the first month you're enrolled in Medicare, your HSA contribution limit is zero, per the IRS. You can still spend the money you've saved.

A simple example

Made-up example: Tony has a self-only HDHP for 2027. He puts $150 from each of his 24 paychecks into his HSA, for $3,600. In March he pays a $400 urgent care bill with his HSA debit card. The rest stays in the account and rolls over. When Tony changes jobs in 2028, the HSA comes with him.

Quick tips

• Choose a beneficiary when you open the account. The IRS says what happens to your HSA at death depends on who you name.
• Ask if your employer contributes. That's free money toward your limit.
• Check your HSA provider's fees and investment options.