Health Savings Accounts Explained: How an HSA Works and Who Can Open One

Health care costs can sneak up on any budget. A doctor visit, a prescription or a pair of glasses can throw off your month. A health savings account, or HSA, is one tool that can help, and it comes with tax perks that are rare in personal finance. But you can only contribute if you meet a few specific rules.

This guide explains what an HSA is, who can open one, the current contribution limits, how the tax breaks work in real dollars and the mistakes to avoid.

What is an HSA?

An HSA is a tax-advantaged savings account for medical costs, available to people covered by a qualifying high-deductible health plan. Contributions are tax-deductible or pre-tax, the money grows tax-free, and withdrawals for qualified medical expenses aren't taxed. Unused money rolls over every year, and the account stays yours if you change jobs.

The IRS describes an HSA as a tax-exempt account you set up with a qualified trustee, such as a bank or insurance company. You can use the money for qualified medical, dental and vision expenses for you, your spouse and your dependents. A few features make HSAs stand out:

• The money rolls over. Unused balances carry over from year to year, so there's no need to rush to spend it before December.
• It's portable. The account stays with you if you change employers or leave the workforce.
• Others can chip in. You, your employer, family members or any other person can contribute on behalf of an eligible person.

Who can open an HSA?

Not everyone qualifies. According to IRS Publication 969, you generally must meet all of these conditions 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 disqualifying health coverage. Some extras, like dental, vision and accident coverage, are allowed.
3. You're not enrolled in Medicare.
4. No one can claim you as a dependent on their tax return.

A deductible is the amount you pay for covered care before your insurance starts paying. For 2026, an HSA-eligible HDHP must have a deductible of at least $1,700 for self-only coverage or $3,400 for family coverage, with out-of-pocket costs capped at $8,500 and $17,000. Your plan documents or HR team can tell you whether your plan qualifies. HDHPs can still cover preventive care, like routine checkups, immunizations and screenings, before you meet the deductible.

What changed in 2026

The tax law passed in July 2025 widened HSA eligibility. Starting January 1, 2026, bronze and catastrophic health plans count as HSA-compatible even if they don't otherwise meet the HDHP definition, and the IRS has clarified they don't have to be bought through a marketplace exchange to qualify. People in certain direct primary care arrangements can also contribute to an HSA and use it to pay those periodic fees. The law also made permanent the rule that lets an HDHP cover telehealth before you meet the deductible without costing you HSA eligibility.

How much can you contribute?

The IRS sets the limits each year. Contributions from you, your employer and anyone else all count toward the same cap.

• 2026: $4,400 for self-only coverage and $8,750 for family coverage.
• 2027: $4,500 for self-only coverage and $9,000 for family coverage, under Revenue Procedure 2026-24.
• Age 55 or older: an extra $1,000 catch-up contribution each year, as long as you're not enrolled in Medicare.

For 2027, the HDHP minimum deductible rises to $1,750 for self-only coverage and $3,500 for family coverage.

The triple tax advantage

1. Money goes in with a tax break. Contributions you make yourself are deductible on your federal return, even if you don't itemize. Contributions your employer makes, including through payroll, generally aren't counted as your income.
2. Money grows tax-free. Interest and investment earnings aren't taxed while they stay in the account.
3. Money comes out tax-free for medical costs. Withdrawals used for qualified medical expenses aren't taxed.

Very few accounts give you a tax break at all three stages. That's why some people use an HSA as both a health care fund and a long-term savings tool. State tax treatment can differ, so check your state's rules.

What the tax break is worth: a worked example

Say you're single, have an HSA-eligible plan and are in the 22% federal income tax bracket. If you contribute the 2026 maximum of $4,400, you cut your federal income tax by about $968. A family contributing $8,750 in the same bracket saves about $1,925. Repeat the single contribution every year for a decade at the 2026 limit, and the federal income tax savings alone add up to nearly $9,700.

Now say you can cover routine medical costs out of your regular budget and leave the HSA invested. Contributing $4,400 a year for 10 years at a hypothetical 5% annual return would grow to about $58,100, and none of that growth is taxed if you eventually spend it on qualified medical costs. Many HSA providers let you invest your balance once it passes a minimum, but investments can lose value.

Rules and mistakes to watch out for

• Non-medical spending costs extra. Money withdrawn for anything other than qualified medical expenses is taxed as income and generally hit with an additional 20% tax. That 20% doesn't apply after you become disabled, reach age 65 or die, but non-medical withdrawals are still taxed as income.
• Keep your receipts. You need records showing your withdrawals paid for qualified expenses that weren't reimbursed elsewhere.
• Timing matters. Medical expenses from before you set up your HSA don't count as qualified, so open the account soon after your HDHP coverage starts.
• Don't double-dip. You can't use HSA money for a cost insurance already paid, or deduct medical expenses on your tax return that you paid with HSA money.
• Stop contributing before Medicare. Your contribution limit drops to zero starting the first month you're enrolled in Medicare.
• File the right form. HSA activity is reported on IRS Form 8889 with your tax return.

HSA vs. FSA

A flexible spending account (FSA) is a different workplace benefit. FSA money is generally tied to a plan year, and unused funds may be lost unless your employer's plan offers a limited carryover or grace period. An HSA is your own account and rolls over indefinitely. Our guide to flexible spending accounts explains how FSAs work.

Is an HSA a good fit?

An HSA may be worth a closer look if you already have or are choosing an HSA-eligible plan, you could afford the higher deductible if you needed care, and you like the idea of saving for future medical costs with tax benefits.

An HDHP may be less comfortable if you expect a lot of medical care and would struggle to cover the deductible. At open enrollment, compare your total expected costs for each plan: a year of premiums, plus the deductible and out-of-pocket costs you'd likely face, minus any employer HSA contribution and your tax savings. Our guide to health insurance terms can help you read the plan details, and understanding your employee benefits covers the rest of your enrollment choices.

Your HSA checklist

1. Confirm your plan is HSA-eligible.
2. Open the HSA soon after coverage starts, through your employer or a provider you choose.
3. Set a contribution that fits under the annual limit, counting any employer money.
4. Keep enough in cash to cover your deductible, and consider investing the rest if you won't need it soon.
5. Save receipts for every withdrawal.
6. Mark the month before Medicare enrollment as your last contribution month.