A Health Savings Account (HSA) allows individuals and families to set aside pre-tax income to later pay for qualifying medical expenses, such as dental appointments and prescriptions.

To qualify for an HSA, you must meet the eligibility standards outlined by the Internal Revenue Service (IRS), including:

  • You must have a qualified High-Deductible Health Plan (HDHP): An HDHP is a type of insurance coverage that features a significantly higher deductible compared to traditional health coverage.
  • You can’t have any other health coverage: You can only be covered by an HDHP, not any other traditional or First Coverage health insurance plans. 
  • You can not be enrolled in Medicare: Medicare is a health insurance plan run by a federal agency for individuals aged 65 or above, as well as younger individuals with disabilities.
  • You can not be listed as a dependent on someone else’s tax return: A dependent means you are a qualifying child or relative who relies on someone else for financial support.

Contribution Limits

HSA contributions are paid into the account by the individual, their family members, or their employer. The maximum contribution for an HSA in 2025 is $4,300 for an individual and $8,550 for a family.

However, individuals who are 55 or above by the end of the tax year can contribute an extra $1,000 to their HSAs, known as ‘catch-up contributions’.

For employer-sponsored plans, the annual contribution limit above applies to the total amounts contributed by both the employer and the employee. 

Self-employed or unemployed individuals can also open an HSA at select financial institutions, such as banks and credit unions, provided that they meet the eligibility requirements. The individual and their family members can contribute to the HSA. 

HSA contributions don’t need to be used within the tax year, as unused funds roll over to the following year, allowing your savings to grow. Additionally, an HSA is portable, meaning that if an employee changes jobs, they can still retain their HSA.

Tax Benefits of an HSA

HSAs are one of the best savings and investment tools available under the US tax code, offering triple tax benefits.

Firstly, the contributions you make to your HSA come from your income before it is taxed. This lowers your taxable income, reducing the amount you pay in Income Tax.

Next, the money in your HSA can earn interest and other growth, which is not taxable.

Finally, money withdrawn from an HSA is not taxed as long as it is used to pay for services that the IRS considers qualified medical expenses (explored below). If withdrawals are used to pay for non-qualifying expenses, the IRS will take a 20% penalty on the funds withdrawn.

Qualifying Medical Expenses

The IRS has outlined a list of qualifying medical expenses that an HSA can cover, which includes dental services, vision care, prescriptions, over-the-counter medications, co-pays, psychiatric treatments, acupuncture, ambulance costs, doctor appointments, hearing aids, and certain long-term care services.

In most cases, you cannot pay your health insurance premiums with HSA funds. The only exceptions to this are when HSA funds are used to pay Medicare premiums or healthcare continuation coverage while you’re on unemployment compensation.

HSAs vs FSAs

​​HSAs and Flexible Spending Accounts (FSAs) can both be used for medical expenses. However, some key differences exist between them, including: 

  • Portability: FSAs are employer-sponsored plans, and unlike HSAs, they are not portable if you change jobs.
  • Job requirements: Only employed individuals can have an FSA, whilst anyone with an HDHP can sign up for an HSA, even if they are unemployed or self-employed.
  • Carry-forward rules: Unused FSA funds don’t carry over and are lost after the tax year ends, whilst HSA funds roll over each year, allowing your savings to grow over time.
  • Contribution limits: The maximum contribution for an FSA for the 2025 tax year is $3,300, whilst the maximum contribution for an HSA is $4,300 for an individual. Additionally, your elected contribution amount for an FSA is fixed, whereas HSA contributions can be flexible.