Do You Have to Spend Your HSA Every Year?

A Health Savings Account (HSA) serves as a tax-advantaged savings vehicle designed to help individuals cover qualified medical expenses. These accounts offer a unique way to manage healthcare costs while providing potential financial benefits over time.

The Basics of Health Savings Accounts

Unlike some other health-related accounts, a Health Savings Account (HSA) does not operate under a “use-it-or-lose-it” rule. Funds contributed to an HSA roll over from year to year, allowing individuals to accumulate savings over time for future healthcare needs. This rollover feature means there is no requirement to spend down the balance by a specific deadline, providing significant flexibility. HSAs are owned by the individual, making them portable; the account remains with the account holder even if they change employers or health plans. This individual ownership allows funds to be carried across different jobs and calendar years.

HSAs offer a triple tax advantage, which contributes to their appeal as a long-term savings tool. Contributions made to an HSA are tax-deductible or made pre-tax if through payroll deductions, which can reduce taxable income. The funds within the account can grow tax-free through interest or investment earnings. Furthermore, withdrawals are tax-free when used for qualified medical expenses.

Eligibility and Funding Your HSA

To be eligible for a Health Savings Account, an individual must be covered by a High-Deductible Health Plan (HDHP) on the first day of the month. An HDHP is generally characterized by lower monthly premiums but higher annual deductibles compared to traditional health plans. The Internal Revenue Service (IRS) sets specific minimum deductible and maximum out-of-pocket limits for HDHPs. For instance, in 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The maximum out-of-pocket expenses for an HDHP in 2025 cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Individuals cannot contribute to an HSA if they are enrolled in Medicare, have other health coverage that is not an HDHP (with limited exceptions), or can be claimed as a dependent. Contributions to an HSA can be made by the individual, an employer, or both. Many employers offer the option for employees to contribute directly from their payroll, which can be pre-tax. The IRS establishes annual contribution limits for HSAs, which vary based on coverage type (self-only or family) and age. For individuals age 55 and older, an additional “catch-up” contribution is permitted annually.

How to Use Your HSA Funds

HSA funds are primarily intended to pay for qualified medical expenses, which include a wide range of healthcare costs. These expenses can cover deductibles, copayments, and coinsurance, as well as prescription drugs, vision care, and dental services. Examples of qualified expenses also extend to ambulance services, certain over-the-counter medicines, and even breast pumps. Withdrawals for these qualified medical expenses are tax-free.

If HSA funds are used for non-qualified expenses before the account holder reaches age 65, the withdrawn amount becomes taxable income and is subject to an additional 20% penalty. This penalty is waived if the account holder is age 65 or older or becomes disabled, though the withdrawals for non-qualified expenses will still be subject to income tax. Keeping detailed records, such as receipts, is important to demonstrate that withdrawals were for qualified medical expenses. A notable advantage of HSAs is the ability to invest the funds for potential growth, similar to a retirement account. This investment feature allows the account balance to potentially increase over time, providing a larger pool of funds for future healthcare needs, especially in retirement.

HSA vs. Flexible Spending Accounts

The primary distinction between a Health Savings Account (HSA) and a Flexible Spending Account (FSA) lies in the rollover of funds. FSAs are typically subject to a “use-it-or-lose-it” rule, meaning that any unused funds generally must be spent by the end of the plan year or they are forfeited. While some employers may offer limited exceptions, such as a grace period of up to two and a half months to use funds or a small carryover amount (e.g., up to $660 for plan years ending in 2025), this contrasts sharply with the HSA’s indefinite rollover feature.

Another key difference is account ownership; an HSA is owned by the individual and is fully portable, allowing funds to be taken if one changes jobs or health plans. Conversely, an FSA is employer-owned, and the funds are typically not portable if employment ends. Furthermore, HSA funds can be invested for potential growth, which is not an option with an FSA. While both accounts offer tax advantages for healthcare expenses, the long-term savings potential and flexibility of an HSA often make it a distinct choice for those eligible.