A health savings account (HSA) is a tax-favored savings account allowed under § 223 of the Internal Revenue Code. The HSA is owned by the individual and held at a bank, brokerage, or other financial institution. Eligible employees can contribute pre-tax money to their HSAs and then use the funds for qualified medical expenses, such as deductibles and out-of-pocket costs not covered by their regular health plans. Employers also may contribute to their eligible employees’ HSAs.

Unlike health flexible spending accounts (HFSAs), there are no use-or-lose rules for HSAs, so the account may grow substantially over time. HSA funds can earn simple interest or be invested in stocks, bonds, or other vehicles chosen by the account holder. Contributions and any earnings or investment gains are exempt from federal taxes (and most state taxes). Withdrawals from the account also are tax-free, provided they are used to pay for qualified medical expenses.

HSAs are entirely portable and are not tied to any employer. The account holder (employee) owns their HSA and controls all transactions, including investment decisions and when and how to spend the funds. There is no time limit on using the funds. An HSA may be a valuable tool to save for health expenses incurred before and after retirement.

However, there are rules. HSAs offer significant tax advantages, but they must comply with rules issued and enforced by the IRS regarding eligibility, contributions, taxes, qualified medical expenses, and more. For details, see the following:

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