Do I Have to Use My HSA by the End of the Year?

A Health Savings Account (HSA) functions as a tax-advantaged savings account for healthcare expenses. This account is paired with a high-deductible health plan (HDHP), allowing participants to contribute pre-tax dollars for eligible medical costs. Many people commonly wonder if HSA funds operate under a “use-it-or-lose-it” rule, similar to other health accounts. Understanding HSA characteristics is important for managing healthcare finances.

HSA Fund Rollover and Ownership

Unlike other benefit accounts, HSA funds do not expire at the end of the year. Unused money in an HSA rolls over indefinitely, allowing the account balance to grow. This feature ensures funds remain available for your healthcare needs, whether immediate or in the distant future.

The funds within an HSA are owned by the individual account holder, not by an employer or insurance company. This personal ownership means the account is portable; it remains with you even if you change jobs, switch health insurance plans, or retire. The money can also be invested once the account reaches a certain balance, offering the potential for tax-free growth on earnings. Contributions to an HSA are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free, creating a significant financial advantage for healthcare savings.

Eligible Medical Expenses

HSA funds can be used to pay for a wide range of qualified medical expenses, as defined by the IRS. These expenses include costs for diagnosis, treatment, or prevention of disease, and treatments affecting any body function. Common examples include doctor’s office visits, prescription medications, dental care, vision care, and certain over-the-counter medical supplies and equipment.

Expenses can be incurred by the account holder, their spouse, or any dependents listed on their tax return. Maintain detailed records, such as receipts and explanations of benefits, for all medical expenses paid with HSA funds. These records serve as substantiation if the IRS requests proof that withdrawals were for qualified medical purposes, aligning with IRS Publication 502.

HSA vs. FSA: Key Differences

Confusion regarding whether HSA funds expire often stems from Flexible Spending Accounts (FSAs). While both HSAs and FSAs are designed for healthcare expenses, their rules differ significantly, particularly concerning fund rollover. FSAs typically operate under a “use-it-or-lose-it” rule, meaning funds not spent by the end of the plan year are generally forfeited.

Some FSA plans may offer limited exceptions to this rule, such as a grace period of up to two and a half months after the plan year ends to use funds, or a carryover of a small portion of unused funds to the next year, which for 2024 is capped at $640. In contrast, the Health Savings Account’s defining feature is its unlimited rollover capability and individual ownership, setting it apart from employer-sponsored, time-limited FSAs. This difference allows HSAs to function as a long-term savings and investment vehicle for healthcare costs, rather than just a short-term spending account.