An HSA, or health savings account, is a tax-advantaged account available to people enrolled in a qualifying high deductible health plan (HDHP). It helps you cover healthcare costs today while building savings for the future.
HSA benefits
There are lots of advantages to having an HSA. HSAs provide triple-tax savings:
The money the employee puts into an HSA is pre-tax
The gains made from investing HSA money are not taxed (While the IRS does not tax your contributions or gains, some states do. So make sure to consult your accountant.)
HSA money that has been withdrawn and used for qualified medical expenses is tax-free
Plus, an HSA is your personal account that stays with you for life—as opposed to an FSA, where there’s a “use it or lose it” rule. Whatever you don’t use just rolls over from one year to the next.
As a bonus, your HSA can serve as a backup retirement account. Once you turn 65, you can take money out of your HSA to spend on anything you want. Withdrawals used for qualified medical expenses remain tax-free, while non-medical withdrawals are subject to income tax.
Opening an HSA account
You have to have health coverage under an HSA-qualified HDHP in order to make contributions to an HSA. Employers can offer HDHPs and HSAs together, but they do not have to. You can also open up your own HSA.
Once you have money in your HSA, you can withdraw from it to pay for medical expenses at any time, even if you’ve switched to a health plan that isn’t an HDHP.
HSA contribution limits
The HSA contribution limit in 2026 is $4,400 for an individual with HDHP coverage and $8,750 for family HDHP coverage. For HSA account holders age 55 or older, the contribution limit is $1,000 higher than the individual or family limit. Contributions can also only be made if the employee has coverage under an HSA-qualified high-deductible health plan (whether or not that plan is employer-sponsored).
Employers can also contribute to their employees’ HSAs, but the total contribution amount—from the employee, the employer, and anyone else who contributes to the employee’s account—can’t be more than those limits. If employers choose to contribute to employees’ HSAs, they have to do so in a way that’s non-discriminatory.
When deciding how much to contribute, a good rule of thumb is to contribute at least enough to cover your plan’s deductible, so you’re prepared for medical expenses. If you’re able and want to maximize the benefit, you can also treat your HSA as a long-term savings vehicle and use it as an additional retirement account.
HSA penalties
You can only contribute to an HSA for the months in which you qualified by being enrolled in an HDHP. This means that to max out your HSA contributions for the year, you would need to have been eligible and enrolled in the HDHP for the entire calendar year.
There are exceptions to this rule, but they come with a risk. As long as you are eligible and enrolled in an HDHP on December 1 of the year, you can still deposit the maximum contribution for that year.
But if you make the full-year contribution instead of a prorated amount, you must continue to have HDHP coverage for the entire following year.
If you end up dropping your HDHP coverage partway through the following year, you’ll have to pay taxes and a penalty on some of the money you contributed to your HSA during the year when you didn’t have HDHP coverage the entire year.
Here’s how this works: The IRS would look at how much you would have been allowed to contribute on a prorated basis (for the months when you had HDHP coverage) and subtract it from the amount you actually contributed. The difference will be included in your taxable income and will also be subject to a 10 percent penalty.
So if you enroll in an HDHP mid-year, you’ll want to weigh your options in terms of how much to put in your HSA that year.
If you’re confident you’ll continue to have HDHP coverage throughout the following year, you can benefit tax-wise by contributing the full annual contribution amount to your HSA. But if you think you might not continue to have HDHP coverage throughout the following year, you may want to consider sticking to a prorated HSA contribution.
Contribute to your HSA now
If you have access to an employer-sponsored HSA through Gusto, you can start contributing or update your contribution amount at any time by simply going to the Benefits tab after logging in. Contributions are made through payroll, making it an easy, automatic way to save for healthcare expenses. Want step-by-step instructions? Check out this guide on how to manage your HSA in Gusto.
FAQs
Why choose an HDHP with an HSA?
A high deductible health plan (HDHP) paired with an HSA allows eligible individuals to open a health savings account to pay for qualified medical expenses. An HSA-eligible HDHP typically has lower premiums but higher out-of-pocket costs before coverage begins.
The IRS sets annual contribution limits and defines HDHP requirements each tax year. You can review official HSA and HDHP rules in IRS Publication 969. HealthCare.gov also provides an overview of how HSAs work with health insurance.
Is it better to put money into HSA or 401k?
An HSA and a 401(k) are both tax-advantaged accounts, but they serve different purposes. An HSA is designed for healthcare and requires enrollment in an HSA-eligible high deductible health plan, while a 401(k) is focused on retirement savings.
Under IRS rules, HSA contributions are generally pre-tax, subject to annual contribution limits, and withdrawals for qualified medical expenses are typically tax-free.
Where does HSA money go if you don’t use it?
Unused HSA funds remain in the health savings account and roll over automatically to the next year. There is no use-it-or-lose-it rule like with some flexible spending accounts (FSA).
What is the downside of having an HSA?
An HSA is only available to individuals enrolled in an HSA-eligible HDHP, which generally involves higher upfront out-of-pocket health care costs before insurance coverage applies. Eligibility requirements, contribution limits, and tax treatment of withdrawals are defined by the IRS.
What expenses can I use for my HSA?
An HSA can be used for a wide range of qualified medical expenses defined by the IRS. These include deductibles, copayments, coinsurance, prescription drug costs, dental expenses, vision care, and certain long-term care services.A full list of eligible qualified expenses is available in IRS Publication 502 — Medical and Dental Expenses.
