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HEALTH SAVINGS ACCOUNT (HSA) is the most efficient tax-advantaged investment account because it offers a triple tax advantage:
One of the best uses of an HSA is to actually invest the balance.
For example, I keep $500 (the minimum required balance) in cash. The rest, I invest in low-cost index funds. This allows me to maximize compounding inside the HSA account.
I also receive a $1,000 HSA match. Since I’m young and my medical expenses are low, it’s a great way to minimize taxes and grow the balance. I will also not touch my HSA at all, even if I have medical expenses. I will reimburse myself 20-30 years down the road (more on this in a bit).
But if you are paying medical expenses with the HSA, you should have at least a portion of the funds in a Treasury fund or money market fund (MMF) for stability. Generally, this amount should be equal to at least one year of deductible costs.
Rules
To contribute to an HSA, three things must happen:
Importantly, before enrolling in a high deductible plan, you need to decide whether it’s worth it in the first place. You will generally receive the biggest benefit from an HDHP if you are in good health (more on this in a bit).
2. You aren’t enrolled in Medicare.
3. You cannot be claimed as a dependent.
Importantly, the HSA balance never expires. This account is always yours to keep, even if you leave your employer. Some people confuse an HSA with an FSA (which does expire, aside from a small potential rollover option).
The account typically works like a “bank account,” where you make deposits and can withdraw money via online transfers or checks, or invest it like a brokerage account.
Contributions
The 2026 contribution limit is $4,400 for an individual plan and $8,750 for a family plan, with an additional $1,000 catch-up contribution if you are 55 or older.
The contribution limit includes both your contributions and your employer’s contributions.
If your employer allows it, contributing to an HSA via payroll deduction is generally better than contributing directly, as it avoids the 7.65% FICA (Social Security and Medicare) taxes. Direct, after-tax contributions only save on income tax when filing, missing the payroll tax savings.
Withdrawals
Withdrawals for medical expenses are tax-free. IRS Publication 502 has information about which expenses qualify as medical expenses.
In addition, as long as you keep proper records, you can reimburse yourself in a later year.
I keep track of all my medical expenses in a spreadsheet (e.g., with columns for EOB documents, receipts, bills, etc). I plan to reimburse myself in the future, assuming the law doesn’t change. In 2025, House Bill 6183 was proposed to change the reimbursement limit to expenses no older than two years, but it didn’t gain any traction. If there is a change in legislation, I plan to reimburse myself for all prior medical expenses before enactment.
Once you turn 65, you can withdraw money from your HSA for any reason without penalty. However, you will owe income taxes on any non-medical withdrawals, effectively making this similar to a Traditional 401(k) or IRA.
Inheriting an HSA
Per Publication 969, if your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.
If your spouse isn’t the designated beneficiary (e.g. your child is the beneficiary), the account stops being an HSA and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you pass away.
This is why tax free HSA dollars should ideally be spent before passing down an inheritance due to tax inefficiency. On the other hand, naming a beneficiary in a low-income tax bracket to receive the deceased person’s HSA can also be beneficial for tax purposes.
HSA can be powerful, but make sure the math makes sense. If you spend thousands of dollars on medical bills, having a standard plan could outweigh all the tax savings you can get.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
For me, the money I saved with the lower premium on the HDHP was about equal to my deductible. So my worst case scenario was breaking even if I had to spend the entire HSA contribution on medical bills. I was lucky, my health was great. By the time I turned 65, my HSA account stood at approximately $25,000.
Be aware that at least one congress person is proposing to change HSAs in a way that limits their usefulness.
https://doggett.house.gov/media/press-releases/republicans-plot-latest-health-rollback-rep-doggett-introduces-hsa-consumer
One “feature” of the proposed legislation: Limit the window for reimbursement to two years from when a qualified medical expense was paid. Currently, accountholders can reimburse themselves for expenses incurred decades before—so long as they had an HSA at the time of the expense.
I am sorry, but I find this very complicated. And when I was younger this was not even offered. Anyway I guess I lucked out. I invested those funds and have done well with the S&P 500, and has worked out for us, even though I have cancer and had to take some $20,000 drugs per month for a couple of years. Yes, Medicare saved me. I am fortunate.
Yes, it is more complicated than having a modern universal healthcare system, like all of the more developed countries have.
In the early days of our HSA (2005), it was an easy choice HSA premium + balance of family ded after Employer contributions <= premium for trad 80/20 plan, and less stressful for me. There were more years we only were able to “top off” the HSA to cover our exposure too. As the years have gone on, the family ded now exceeds the max contribution, so I’m not sure we’d make the same choice starting out now. I’m glad we have it, but I don’t think it’s what it was previously.
now my question, since our family plan is through my DH, is there anyway for me to be able to contribute my $1k catchup (he does his) too? Although I’m working again, I’m not eligible for coverage through my employer and have minimal earnings (2025 <$100, 2026 <$8k). Thanks everyone 🙂
Re: your $1k catch-up, yes, you can. Open an HSA with, say, Fidelity (a pretty good option) and contribute there.
Thanks for the article Bogdan. I want to make a few additional observations I formed as CPA previously before I retired. I have worked with HSAs mostly from the employer viewpoint, but also as a user of our own personal HSAs and from preparing individual 1040s.
Both Benefit Jack and Richard Quinn both appear to have worked for large corporations that had the ability and willingness to have multiple group health plans employees could choose between where some plans were HSA eligible and some were not. Many, if not most, of the closely held employers I worked with were limited to a single type of plan either by the employer cost of the plan or the time devoted to the operation of the plan, or both. For some small employers the age demographics and past health cost history of the covered group made group coverage unavailable or unaffordable to the business. For some employers the ACA marketplace plans were a better cost option for both the employer and the employees. Some small employers just stopped offering group plans when the ACA plans became available.
Some smaller employers pick group plans where the employee’s share of the premium cost would result in employees actually electing to participate. If the typical employee had trouble paying basic housing and living needs from their earnings they are unlikely to choose to participate in the employer group health plan. Small employers often have to have a high percentage of employees enrolled for the insurance company to agree to issue a plan. An employee who has a spouse working for a separate large employer may choose family coverage under the spouse’s employer group plan.
The employers I worked with typically would pay 70% to 80% of the employee total premium and 0% of of any family coverage. Most would have a IRC 125 option for the employee whereby the premium the employee elected to pay would be paid with pretax dollars for federal, state and FICA taxes.
Really large employers often self insure the group health insurance benefits paid out, often with a stop loss provision for an employee with a major medical expense. Small employers typically either can not or will not choose to self insure because of a future unlimited or unreasonable uninsured liability that they can not control.
Some smaller professional employers with only a limited staff (think doctors, lawyers, accountants, etc.) would join a PEO (professional employer organization) where 100 or so small employers would join together for benefit buying purposes to be able to obtain a reasonably priced benefit plan. The single member LLC owner that I worked decades for joined a PEO when the premiums became unaffordable for his five employees.
Most small employers are organized as a pass through limited liability entity (like a Limited Liability Company (LLC) for example among many types) for tax and liability protection purposes. The significance of the entity choice is that LLC owners group benefits are often taxed differently for those with any LLC ownership interest compared to the W-2 employees. This owner vs. W-2 employee difference adds complexity to both the business and personal tax returns of the owners. Tax and compliance costs to owners can be a mixed bag when it comes to their group plans.
As an employee participating in HSA if your W-2 has a code W in box 12 showing a HSA elected amount (amount includes any non-elective employer contribution) or you took any distribution from your HSA then be sure your 1040 has an appropriate form 8889 titled Health Savings Accounts (HSAs) attached to avoid an unwanted notice from the IRS.
The HSA rules do have complexities so it is incumbent on you to learn the rules that apply to you to make this a benefit for you and not a headache. I would start learning about HSAs with IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans and go from there to higher level information sources. Of course like most tax rules the current tax and plan rules can and will change. Plan accordingly.
Two more items to add.
Married couples have an additional tax benefit, the balance continues in the same form to the survivor. The tax advantages and compounding continue. But when the surviving spouse dies, whoever inherits the balance will be subject to ordinary income tax on the balance. I never reimbursed myself from the HSA until my wife died. Since then, I use the HSA to pay for the few medical bills I have and reimburse myself for my Medicare Part B premiums, so my kids won’t have a tax surprise.
Remember to keep ALL your receipts for unreimbursed medical care. You can reimburse yourself at any time. So, let the power of tax-free growth work for you. I’ve had an HSA since 2004 and last March decided to buy a new to me vehicle. I simply dug out the HSA shoebox and found enough receipts to reimburse myself just a bit more than the price of the truck.
Can HSA be used to reimburse Medicare Supplement Plan G premiums?
Unfortunately, No.
Those in California and New Jersey should also know that those states do not conform to federal HSA tax law. Employer materials often do not mention this pitfall. Please do your research before you sign up and contribute.
My daughter has an Obamacare bronze plan with a $4,125 deductible. We called her health care exchange and they said it is not an HSA eligible plan. Very confused as to how to advise her because my understanding from this post and others is that it should be HSA eligible. (Her salary is slightly above the Obamacare subsidy cliff and my advice to her is to fund an IRA to get her below $62,400).
The definition of eligibility for a Health Savings Accounts was expanded under the One, Big, Beautiful, Bill Act (OBBBA) in IRS Notice 2026-5 (issued 12/9/2025) starting 1/1/2026 (the OBBBA was signed into law on 7/4/2025).
I do not know if your daughter’s income is at a level which would preclude her being eligible receive a ACA credit or if she was offered a group health plan from her employer which could disqualify her from even enrolling in an ACA plan. She likely would want to get a second opinion from someone who is expert in such matters before taking action.
The relevant part of Notice 2026-5 reads as follows –
Section 71307 of the OBBBA amended section 223(c)(2) of the Code to provide that the term “high deductible health plan” includes any plan described in subsection (d)(1)(A) or (e) of section 1302 of the Patient Protection and Affordable Care Act (ACA) that is available as individual coverage through an Exchange.
Section 1302(d)(1)(A) of the ACA describes a bronze level plan, which is required to provide a level of coverage that is designed to provide benefits that are actuarially equivalent to 60 percent of the full actuarial value of the benefits provided under the plan. Section 1302(e) of the ACA describes a catastrophic plan, which is a health plan solely offered in the individual market that does not provide bronze or higher levels of coverage and that generally provides essential health benefits only after an individual has incurred the maximum cost sharing under section 1302(c)(1) of the ACA (other than required preventive health care and coverage for at least three primary care visits).
Thanks for the reply. My daughter’s employer does not provide healthcare unfortunately, she works for a small non-profit with 5 employees.
Maybe the person we spoke to at her healthcare exchange did not have up to date information related to HSA eligibility. It seems like her plan should be eligible based on what I’m reading from the IRS, the plan deductible meets the threshold and I didn’t see any reference to certain bronze plans NOT being eligible (but obviously I need to re-read this to make sure I’m not missing something).
I’m a retired CFO who should be able to figure this out – if I’m struggling how can a “lay person” navigate this?
I wonder if you or your daughter could make use of healthcare.gov to determine if the plan she is enrolled in makes her HSA eligible?
I agree with you that the level of tax complexity regarding health care is unreasonable.
We actually did as you suggested before I posted. She lives in New York and we called the NY state healthcare exchange that her plan was purchased through (NY State of Health) and spoke to someone there who said the plan was not HSA eligible. (This was at the suggestion of Fidelity who said they would open an account if she wanted but would not assess or validate eligibility.)
I wonder whether the NY marketplace has updated their information to reflect the new law, though one would assume they have done so.
The federal link takes you to a similar link for NY. I would expect that NY would have been on top of changes in Notice 2026-5 but you may want to actual use the NY lookup features and the actual plan she signed up for to see if her plan is listed as HSA eligible or not. It may just be that the plan your daughter signed up for is not an eligible plan for some reason.
Asking AI about if there are HSA eligible available I got this response –
Yes, the NY State of Health Marketplace (nystateofhealth.ny.gov) offers ACA-compliant health plans that are Health Savings Account (HSA) eligible. As of 2026, all Bronze and Catastrophic plans on the Marketplace are HSA-eligible. These plans must be paired with a High Deductible Health Plan (HDHP).
I hope this helps.
Best, Bill
I have had a Health Savings Account since I enrolled in Affordable Care Act (Obamacare) health insurance in 2021. The original post cites an $8,500 limit on a plan’s out-of-pocket maximum for it to be HSA-eligible in 2026. That was news to me. My new ACA plan for 2026 has an out-of-pocket maximum of $10,000, yet it is labeled on healthcare.gov as HSA-eligible. I assume — and hope — that what I see on third-party websites is true: the 2025 One Big Beautiful Bill Act’s declaration that all ACA bronze plans are HSA-eligible in 2026 supersedes the $8,500 threshold. If not, I will regret having front-loaded my full-year HSA contribution in January.
Hi Joe. My reading indicates the 2026 $8,500 limit on a plan’s out-of-pocket maximum is for self-only plan and for a family plan OOP max is $17.000. I am not sure which applies to your situation. I hope this helps.
My plan is self-only, so the $8,500 limit would apply if my having a bronze plan doesn’t take precedence.
Per KFF commentary it would appear to me that having a bronze plan does take precedence.
Thanks. That jibes with what I read elsewhere, but more explicitly.
I’ve been a proponent of HSA-capable coverage since passage of the 2003 legislation and a HSA owner since 1/1/05. Our HSA accounts (myself and my spouse) now exceed $250,000. We transitioned almost all employees with health coverage at my Fortune 100 employer to HSA-capable coverage during the period 2005 – 2011.
Some thoughts to comments previously made (my comments are numbered and in italics):
“HEALTH SAVINGS ACCOUNT (HSA) is the most efficient tax-advantaged investment account because it offers a triple tax advantage.”
(1) Actually, once individuals have saved whatever was necessary to obtain the employer financial support for their 401k and HSA, the next dollar would almost always be better invested in the HSA, before the 401k.
“HSAs have been around since 2004. The (false) idea was they would help employees become better health care consumers if they were spending their own money.”
(2) Actually, the most important factor in offering HSA-capable coverage is to offer workers an option where they can avoid overinsurance – paying too much in contributions for coverage they don’t need. According to Commonwealth studies, the average out of pocket spend of Americans under age 65 depends on the type of coverage you have: ~$682 for private insurance, ~$725 for uninsured, and ~$253 for public coverage. About 1 in 20 adults under 65 spend over $1,700, while 1 in 100 spend over $5,000 annually. However, the median out of pocket spend is < $250 for all Americans under age 65! So, the money not spent on premiums (contributions) for coverage that is far in excess of what they need, can be saved on a tax preferred basis in the HSA.
“Yes, with a HDHP the premiums are lower, but even if those premium savings were all placed the the HSA, it’s not enough to cover the out of pocket risk in many cases.”
(3) In terms of health care costs, HSA-capable coverage doesn’t work unless you actually fund the account. However, for 80+% of workers and their spouses and children under age 65, those who are incurring less than $500 a year in health care expenses, the HSA is almost always the better health coverage choice, accumulating assets for a future when their out of pocket expenses are all but certain to be higher – if only because of Medicare premiums.
“I keep $500 (the minimum required balance) in cash. The rest, I invest in low-cost index funds. This allows me to maximize compounding inside the HSA account. … I will also not touch my HSA at all, even if I have medical expenses. I will reimburse myself 20-30 years down the road (more on this in a bit).”
(4) The better option is to invest 100% of the HSA assets in something other than capital preservation, taking any medical spending receipts and putting them in a “shoebox”, allowing the assets to accumulate tax deferred, and ultimately provide reimbursement tax free. Your current day payment of medical expenses with after-tax dollars becomes a unique tax-preferred investment.
“I also receive a $1,000 HSA match.”
(5) Most company contributions to HSAs are in the form of a non-elective contribution in order to pass discrimination tests. The better solution for most employers would be to establish the company contribution as a matching contribution, to provide an incentive for individuals to save in their HSA. I recommend you consider using the same method/formula that you already have in place in your 401k plan.
“To contribute to a HSA, three things must happen: You need a high deductible health plan (HDHP).”
(6) Stop calling it a High Deductible Health Plan. We no longer call the 401k by its original name: a “salary reduction savings plan”. And, keep in mind that the $1,700 minimum deductible for HSA-capable coverage is actually LESS THAN the average deductible shown in the 2025 Kaiser survey of employer-sponsored coverage.
“Importantly, the HSA balance never expires. This account is always yours to keep, even if you leave your employer.”
(7) The HSA is much the same as an IRA. With few exceptions, the HSA is not subject to ERISA. You are the owner. Ensure you name a beneficiary – just as you would for an IRA. Available investments for a HSA are much the same as those for an IRA.
“If your employer allows it, contributing to an HSA via payroll deduction is generally better than contributing directly, as it avoids the 7.65% FICA (Social Security and Medicare) taxes. Direct, after-tax contributions only save on income tax when filing, missing the payroll tax savings.”
(8) Of course, you should encourage your employer to add HSA contributions to their cafeteria plan – so that the employer can also avoid FICA and FICA-Med taxes on your contributions. Keep in mind that whether you contribute via your employer’s cafeteria plan or by taking an above the line tax deduction when filing your tax return, your contributions also generally avoid most state income taxes.
“Withdrawals for medical expenses are tax-free. IRS Publication 502 has information about which expenses qualify as medical expenses.”
(9) The HSA is not only the benefit that offers Americans the greatest tax preference, it is also the benefit that offers Americans the greatest utility:
(a) Eligible expenses today include medical, dental, vision, hearing, Rx, and Long Term Care (LTC) out of pocket expenses, COBRA premium, and certain LTC insurance premiums,
(b) Eligible expenses in retirement include all of the above plus Medicare Part A, Part B, Part D and IRMAA premiums, as well as any premiums you pay for employer-sponsored retiree medical coverage,
(c) Penalty tax free distributions after age 65 to provide income in retirement, and
(d) Survivor benefits, tax preferred reimbursement for medical expenses and premiums for a surviving spouse or other tax dependent, a taxable benefit to other beneficiaries for any residual.
The claims clock starts, and eligible expenses include all of those incurred after you open your HSA, REGARDLESS of when you contribute to the HSA. In that way, it is akin to an old benefit concept, what was once known as a ZEBRA.
“Once the accumulated funds are exhausted the HSA is useless until the fund is replenished.”
(10) Generally speaking, this is a misleading statement. Almost all employer-sponsored coverage has a deductible today. The annual Kaiser survey shows that 88% percent of workers with coverage have a general annual deductible that must be met before most services are paid for by the plan and that the average deductible amount in 2025 was $1,886. The average deductible for PPOs was $1,337.
So, for example, where a HSA-capable coverage option is offered alongside a traditional PPO, say the HSA-capable coverage and the PPO have the same out of pocket expense maximum, and that the PPO has a deductible of $1,337 and the HSA-capable option has a deductible of $1,700, the participant’s focus in deciding which coverage to select should be on the difference in deductibles, here $363 plus any medical expenses (typically Rx) that are not subject to the deductible, but typically have a copay.
Most employer sponsored plan communications, such as the Summary of Benefits and Coverage INTENTIONALLY OR UNINTENTIONALLY mislead workers when they are comparing coverage options because they fail to tell the whole story – both point of purchase and point of enrollment cost sharing as well as all employer financial support.
Why is Medicare Supplement Plan G not an eligible expense; i.e., what is the IRS’s reasoning?
Jack, your views are not of the real world for the vast majority workers. Apply it all to a family of four with household income of $75,000. Those folks are not going to have $250,000 at any point, ever. While the average family will not have high expenses in any given year, it only takes one incident to wipe out a few years of accumulation. HSAs benefit higher income individuals and put more average families at risk, especially those not fortunate to avoid high or ongoing health care expenses. Most workers are not able to contribute to an HSA and pay OOP costs at the same time.
Research sources (including EBRI’s HSA database analysis) suggest that a large share of HSA accounts are very low-balance, with many below $500 or even unfunded. For example, one industry report showed that about 51% of HSA accounts had balances of $500 or less and a very small percentage had high balances, which implies a median balance well below the average. The average is only around $4,000 + –
Exactly. People who have the means tout the benefit of the HSA because they can afford it. The rest are left figuring out how they might pay their day to day expenses. The high deductible health plan only further exacerbates their situation. The HSA is a tool for some, the vast majority who can’t save enough to take advantage of an employer match will agree.
I’ve been maxing out my HSA for quite a while. It should hit six figures before I retire.
I keep track of all our healthcare expenses in a spreadsheet, and we average around $4,000 a year in out-of-pocket expenses. We have almost $19,000 in unclaimed expenses, which I consider a backup to our emergency fund, should we ever need it.
The topic of HSAs usually comes up at work around benefit election time, and it amazes me how many people have either no idea how HSAs work, or if they do, don’t know that you can keep the required $1,000 (in our plan) in cash and invest the rest.
I just found out I need a molar extracted and replaced with an implant. I may claim that expense – I have a feeling it’s going to be at least $5k.
Excellent summary, Bogdan! Mr. Quinn is right, it’s certainly no panacea for the health insurance challenges many face, but it can be a great tool. I’m 71 and still have a nice HSA balance that I dip into frequently for the infrequent OOP costs I face with traditional Medicare (like hearing aids, dental, etc.). I invested my HSA as Bogdan suggests, and it paid off pretty well. The triple tax advantaged attribute makes it the best tax shelter going. I guess, like many things in life, HDHPs/HSAs work best for those with enough resources to weather the occasional rough seas. Have that Emergency Fund, folks!!
We (DH & I) have a FamilyHSA through his employer. We have both reached (& passed the 55 pt) so we have added in the extra $1k annual contribution. My question is, how do I get the benefit of the extra $1k contribution? Our family deductible now exceeds the max contribution and I’d like to put aside every bit we can. Important details, I began working again last year (<$100 in wages 2025, <$6,000 for 2026), no benefits – offered or taken. Trying to read the IRS info has not given me a clear answer. Additionally, in the year we begin Medicare (same year & month for us both) will we still be eligible for the months of the year we’re not on Medicare? TIA
HSAs have been around since 2004. The (false) idea was they would help employees become better health care consumers if they were spending their own money. Employers latched on to the idea as a way to shift costs and more risk to workers. The employer gets guaranteed savings, the worker doesn’t.
Yes, with a HDHP the premiums are lower, but even if those premium savings were all placed the the HSA, it’s not enough to cover the out of pocket risk in many cases. Added savings are necessary, especially for families.
HSAs may be a good idea for the healthy and higher income families, not so good for more average people who now are self-insuring more OOP costs. The family now must save for health care, retirement, possibly college and hopefully an emergency fund. And we have also placed the burden of investment decisions on more unprepared families.
All can go well for years, but then the HSA could be depleted quickly with a period of illness in a family. That has happened to two of our sons.
If the illness or another illness extends over two calendar years, the situation is even worse with two high deductibles in a row depleting the HSA.
Once the accumulated funds are exhausted the HSA is useless until the fund is replenished.
Many workers no longer have a choice and must use an HSA, but it is not a pretty picture for many.