The definition, precisely
An HSA under §223 pairs with a qualifying high-deductible health plan: contributions deduct above the line (or bypass payroll tax entirely through an employer), growth compounds untaxed, and withdrawals for qualified medical expenses — deductibles, dental, vision, prescriptions, COBRA and Medicare premiums — come out tax-free. Annual contribution caps are indexed (self-only and family tiers, plus a $1,000 age-55 catch-up), and unlike an FSA nothing expires: the balance is yours forever, portable across jobs and into retirement.
How the HSA actually works
The power move is invest-don't-spend: fund to the cap, invest the balance beyond a cash buffer, pay current medical bills from cash flow, and bank the receipts. There is no reimbursement deadline — a 2026 root canal can reimburse tax-free in 2046 after twenty years of growth. Payroll funding beats outside deposits (skips Social Security and Medicare tax too), and after 65 the account moonlights as a traditional IRA: non-medical withdrawals taxed as ordinary income, no penalty. One account, two retirements.
The fine print
Eligibility is where HSAs die quietly: a spouse's general-purpose FSA disqualifies you, Medicare enrollment (including retroactive Part A) ends contributions, and non-medical withdrawals before 65 draw income tax plus a 20% penalty. Excess contributions face a 6% excise tax every year they sit — withdraw the excess plus earnings before the filing deadline. And the HDHP must be the only coverage: one urgent-care plan on the side taints the whole year.
Frequently Asked Questions
- Anyone covered only by a qualifying high-deductible health plan, not enrolled in Medicare, and not claimed as a dependent. Disqualifiers hide in plain sight: a spouse's general-purpose FSA, VA benefits used recently, or any non-HDHP coverage.
- The IRS sets indexed annual caps — one for self-only coverage, roughly double for family — plus a $1,000 catch-up from age 55. Employer contributions count against the same cap, so coordinate payroll funding with outside deposits.
- Invest it and pay medical bills from cash flow if you can: there is no deadline to reimburse yourself, so receipts banked today can come out tax-free decades from now. The HSA used this way is a second Roth with no income limit.
- It becomes a traditional-IRA twin: medical withdrawals stay tax-free, non-medical withdrawals are taxed as ordinary income with no 20% penalty. Medicare enrollment ends new contributions — stop funding six months before claiming past 65.