HSA Account Rules: What You Must Know Before You Open or Use One
Written by
Andrew Lisa
Edited by
Nupur Gambhir
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
A health savings account (HSA) is a powerful tool with unique tax advantages, designed to help pay for medical expenses and healthcare costs.
The IRS sets strict rules around who qualifies, how much you can contribute each year, and what counts as a qualified withdrawal. Following these rules is key to preserving the HSA’s unmatched triple tax benefit — deductible contributions, tax-free growth, and tax-free withdrawals. No other account type offers all three.
But with these benefits comes responsibility. Misusing an HSA or failing to plan properly can trigger taxes and penalties, which is why understanding the requirements is essential before opening or contributing to one.
Who Is Eligible for an HSA?
To qualify for a health savings account (HSA), you must:
- Be enrolled in a qualified high-deductible health plan (HDHP). These plans have lower monthly premiums but higher out-of-pocket costs before insurance pays.
- Not be enrolled in Medicare or any other non-HDHP insurance plan.
- Not be claimed as a dependent on someone else’s tax return.
Contribution Rules and Limits
Like 401(k)s and IRAs, HSAs have annual contribution limits set by the IRS — and these amounts can change each year. For 2025, the limits are:
- Individual coverage: $4,300
- Family coverage: $8,550
- Catch-up contributions: Extra $1,000 per year starting at age 55
These are combined limits. That means your contributions plus your employer’s contributions can’t exceed the maximum. For example, if your employer adds $1,000 to your HSA, you can only contribute $3,300 for individual coverage.
Important Medicare rule
Once you enroll in Medicare, you must stop contributing to your HSA six months before your benefits start. You can still use the money you’ve already saved to pay for qualified medical expenses Medicare doesn’t cover. your account funds to cover medical expenses that Medicare does not.
Qualified Medical Expenses and Withdrawals You Can Pay With an HSA
Qualified withdrawals from HSAs are tax-free when used for eligible health care expenses, including:
- Medical care, including payments to doctors, dentists and surgeons, hospital care, ambulance services and copays
- Dental expenses for treatments, procedures and hardware
- Vision treatments, exams and products, including Lasik surgery, eye drops and prescription contact lenses
- Mental health, wellness and substance abuse treatment
- Vaccines, X-rays and lab work
- Certain devices, like hearing aids, crutches and wheelchairs
- Family planning products and services
- Eligible prescription drugs
Always confirm that your withdrawals are for qualified expenses
If you use HSA funds for non-qualified expenses before age 65, the IRS will tax the withdrawal as ordinary income and add a 20% penalty. After 65, the penalty goes away, but non-qualified withdrawals are still taxed like regular income. Qualified withdrawals — for approved medical expenses — are always tax-free, no matter your age.
HSA Ownership, Portability, and Rollover Rules Explained
HSAs are flexible and portable savings tools with benefits that extend beyond retirement:
- HSAs belong to you, not your employer. Even if your account is offered through work, it’s yours to keep.
- They’re portable. Your HSA moves with you if you change jobs or switch insurance plans.
- You can keep contributing. As long as you’re enrolled in an HSA-eligible health plan, you can add funds — even if your new employer doesn’t offer an HSA.
Rollover rules you need to know:
- 60-day rule: If you receive HSA funds as a check or bank transfer, you must redeposit them into a new HSA within 60 days or the IRS will treat it as a taxable withdrawal with a 20% penalty.
- One rollover per year: This 60-day rollover option is limited to once every 12 months.
- Unlimited trustee-to-trustee transfers: Moving funds directly from one HSA custodian to another avoids limits and penalties.
HSA Requirements and IRS Reporting Rules
Good record-keeping is essential for managing an HSA effectively. The IRS requires you to track contributions, distributions, and qualified expenses to ensure compliance and preserve your tax benefits. Here’s what to keep in mind:
- Keep documentation. Save receipts, billing statements, and proof of all qualified medical expenses. These records protect you if the IRS audits your HSA activity.
- File Form 8889. You must submit IRS Form 8889 each year to report contributions (yours and your employer’s), distributions, and to calculate your HSA deduction.
- Watch your contribution limits. The IRS imposes a 6% excise tax on any excess contributions. You can avoid this penalty by withdrawing the extra funds or applying them to a future tax year.
Common HSA Mistakes to Avoid
Mismanaging an HSA can cost you in taxes, penalties, or lost savings opportunities. Here are the most frequent pitfalls:
- Contributing when you’re not eligible. For example, making contributions after enrolling in Medicare or while covered by a non-HDHP plan.
- Withdrawing without checking expenses. Always confirm that distributions are for qualified medical expenses before taking money out.
- Spending on non-qualified expenses. Using funds incorrectly can trigger income tax and a 20% penalty (if under 65).
- Ignoring updated limits. Failing to adjust contributions as IRS maximums change can result in excess contributions.
- Skipping record-keeping. Not keeping receipts or documentation of qualified expenses may leave you vulnerable in an IRS audit.
FAQ
- Who qualifies for an HSA?
- You can open an HSA if you’re enrolled in a qualified high-deductible health plan (HDHP), not covered by Medicare or another disqualifying plan, and not claimed as a dependent on someone else’s tax return.
- How much can I contribute each year?
- For 2025, the contribution limit is $4,300 for individual coverage and $8,550 for family coverage. If you’re 55 or older, you can add an extra $1,000 in catch-up contributions.
- What expenses are qualified, and when are withdrawals tax-free?
- Withdrawals are tax-free if used for qualified medical expenses, such as doctor visits, hospital care, prescriptions, dental and vision care, mental health services, ambulance costs, and eligible medical devices.
- What if I contribute more than the limit?
- Excess contributions trigger a 6% IRS excise tax. You can avoid the penalty by withdrawing the extra amount or applying it to a future tax year before the tax deadline. All contributions must be reported on IRS Form 8889.
- Can I use my HSA after enrolling in Medicare?
- Yes, but you must stop making contributions six months before your Medicare benefits begin. You can still use your HSA balance tax-free for qualified medical expenses. After age 65, non-qualified withdrawals are taxed as ordinary income, but the 20% penalty no longer applies.
