Can You Keep an HSA Forever? What Happens to Your Funds

A Health Savings Account (HSA) is a tax-advantaged savings account for qualified medical expenses. Its fundamental purpose is to offer a dedicated financial tool for healthcare costs, providing flexibility and control over medical spending. HSAs offer unique “triple tax benefits”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Understanding HSA Eligibility

To contribute to a Health Savings Account, you must be enrolled in a High Deductible Health Plan (HDHP). For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan’s annual out-of-pocket maximums, including deductibles, copayments, and coinsurance (but not premiums), cannot exceed $8,300 for self-only coverage or $16,600 for family coverage in 2025.

Other criteria for HSA contributions include not being enrolled in Medicare or claimed as a dependent on someone else’s tax return. Disqualifying health coverage, such as a general-purpose Flexible Spending Arrangement (FSA) or a Health Reimbursement Arrangement (HRA), also prevents contributions. Eligibility is assessed monthly; you must meet all requirements for the month to contribute for that period.

Using HSA Funds After Losing Contribution Eligibility

Once deposited, HSA funds remain accessible for qualified medical expenses indefinitely. Even if you no longer meet eligibility criteria to contribute new money, you can still use existing funds. The money does not expire or become inaccessible due to changes in health plan or employment.

Withdrawals for qualified medical expenses are always tax-free, regardless of current contribution eligibility. The IRS defines qualified medical expenses as costs for diagnosis, treatment, or prevention of disease, and treatments affecting any body function. This includes doctor visits, prescription medications, dental care, and vision services, as outlined in IRS Publication 502. These funds can be used for medical costs throughout your lifetime.

HSA and Medicare Enrollment

Medicare enrollment affects your ability to contribute to an HSA. Once you enroll in any part of Medicare (Part A, B, C, or D), you are no longer eligible to make new HSA contributions. This applies even if you continue working and have an employer-sponsored HDHP. Stop HSA contributions before Medicare enrollment to avoid potential tax penalties.

Medicare Part A has a “6-month look-back rule.” If you delay formal enrollment, your Part A coverage can be retroactive for up to six months. This retroactivity can cause HSA contributions made up to six months prior to your Medicare Part A effective date to be considered excess contributions, subject to penalty. Existing HSA funds can still be used tax-free for qualified medical expenses, including Medicare Part B, C, and D premiums, deductibles, copayments, and coinsurance. Medigap (Medicare Supplement Insurance) premiums are generally not qualified medical expenses for HSA distributions.

Managing Your HSA After Death

The disposition of an HSA upon the account holder’s death depends on the designated beneficiary. If a spouse is named, the HSA can be treated as their own, maintaining its tax-advantaged status. The surviving spouse can use the funds for qualified medical expenses, contribute if eligible, and manage the account. This allows for continued tax-free growth and distribution for healthcare needs.

If a non-spouse individual (such as a child) or the estate is the beneficiary, the account ceases to be an HSA upon death. The fair market value of the account becomes taxable income to the beneficiary or estate in the year it is distributed. Funds used for qualified medical expenses incurred by the decedent before their death may be distributed tax-free if paid within one year of death. Non-spouse beneficiaries should understand these tax implications, as the account loses its tax-sheltered status.