How an HSA Works: The Basics

Short answer

A Health Savings Account (HSA) works by letting you set aside pre-tax dollars to pay for current and future medical expenses. You can open one only if you're enrolled in a high-deductible health plan (HDHP). Contributions cut your taxable income, and the money grows tax-free.

What sets an HSA apart from other medical accounts is that the money is yours to keep. You own the account, and any balance you don't spend carries over indefinitely. This makes an HSA both a medical expense account and a long-term savings tool, since you can invest the balance and use it for medical expenses at any point in your life.

Definition and Who Is Eligible for the Account

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help you pay for qualified medical expenses. Unlike other medical accounts, an HSA is owned by you and belongs to you permanently, even if you change jobs or health insurance. To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) with your health insurance.

An HDHP is a health insurance plan with a higher deductible than a traditional PPO or HMO plan, but lower monthly premiums. Healthcare.gov defines it as "a plan with a higher deductible than a traditional insurance plan", where you pay more of your own costs before the insurer starts paying its share. The IRS sets the definition of an HDHP each year based on deductible and out-of-pocket spending limits. If you are enrolled in an HDHP, you are automatically eligible to open an HSA. Self-employed individuals and employees of companies that offer HSA-qualified plans can all open one.

You cannot open an HSA if you are enrolled in a regular health insurance plan, a plan with a low deductible, Medicare, or both an HSA and a health care FSA at the same time. If you have a health care FSA through your employer, you cannot contribute to an HSA in the same year, though some employers offer a limited-purpose FSA paired with an HSA for dental and vision expenses only.

How Money Goes In

You can fund an HSA in multiple ways: through pre-tax payroll deductions from your employer, by contributing directly yourself, or through a combination of both. Unlike an FSA, you don't have to wait for an annual open enrollment to open an HSA if you become eligible. You can open one at any time, as long as you are enrolled in an HDHP.

Contribution Methods

If your employer sponsors an HSA, you can elect to contribute through pre-tax payroll deductions. This money is taken from your paycheck before taxes are calculated, reducing your taxable income. You can also contribute on your own, either to an employer HSA plan or to an individual HSA you open with a bank or investment firm. Contributions you make yourself can reduce your taxable income when you file, as long as you are not covered by another non-HDHP health plan.

Contribution Limits

The IRS sets an annual maximum contribution limit for HSAs. Rev. Proc. 2025-19 puts the 2026 figure in exact terms: "the annual limitation on deductions...for an individual with self-only coverage under a high deductible health plan is $4,400", up from $4,300 in 2025. Family coverage rises to $8,750, up from $8,550. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. Your employer cannot reduce the HSA contribution limit you set for yourself, though they may set a lower limit for employer contributions. Check your plan documents to understand the contribution rules.

Who Can Contribute

You, your employer, and family members can all contribute to your HSA in the same year. Each source must stay within the annual contribution limit, so total contributions from all sources combined cannot exceed the IRS limit. For example, if you contribute $2,000 and your employer contributes $1,500, you've used $3,500 of the $4,400 limit, leaving $900 for the year. Whoever contributes it, the money held in your HSA grows tax-free and can be invested in stocks, bonds or mutual funds if your HSA custodian offers investment options. This is one of the reasons HSAs are considered powerful long-term savings vehicles.

How Money Comes Out: Card, Reimbursement, Who Files

HSA money can be spent on qualified medical expenses through a debit card, by paying out of pocket and requesting reimbursement, or by withdrawing funds directly. You are in control of how and when you use the money, and you can spend it on expenses from any year as long as you were eligible when the expense was incurred.

Using an HSA Debit Card

Most HSA providers issue a debit card that you can use to pay for eligible medical expenses at the point of purchase. You can swipe the card at a pharmacy, doctor's office, dentist, or optometrist. The card automatically deducts the amount from your HSA balance. If the merchant is not recognized as a medical provider, the card may decline or require you to prove the expense is eligible. Unlike an FSA card, an HSA card works at a wider range of retailers, including online health and wellness retailers.

Reimbursement and Direct Withdrawals

You can also pay for a medical expense out of pocket using a personal credit card or cash, then request reimbursement from your HSA. Most HSA providers have an online form for this: you log the expense and attach a receipt, and the payout arrives by direct deposit or check. You can also withdraw money directly from your HSA to pay for an eligible expense, though this is less common than using the card or requesting reimbursement.

What Counts as Eligible

HSA money can pay for any qualified medical expense as defined by the IRS under Publication 502. This includes doctor visits, copays, prescriptions, insulin, dental work, eyeglasses, hearing aids, physical therapy, mental health services, and many other treatments and medical supplies. Cosmetic procedures and general wellness products are not reimbursable. Some items are not automatically on the IRS list but can be reimbursed with a Letter of Medical Necessity (LMN), a note from a licensed clinician naming the condition and explaining how the purchase treats it.

The Letter of Medical Necessity

If you want to use HSA funds for an expense that is not automatically eligible, you can request a Letter of Medical Necessity from a licensed clinician. The letter explains the diagnosed condition and how the purchase treats it. Burst files the letter with your HSA administrator, who reviews it and decides whether the expense qualifies for reimbursement. The letter has to be dated on or before the purchase it covers, so request it before you buy.

Year End and Job Change

One of the biggest advantages of an HSA is that there's no deadline on the money. FSAs have a use-it-or-lose-it rule that forfeits unused money at year end. An HSA works differently: your balance carries forward every year with no expiration date, which makes it a long-term savings tool for medical expenses in retirement or later in life.

Money Never Expires

Your HSA balance rolls over from year to year with no limit on how much you can accumulate, and there's no forfeiture rule of any kind attached to it. An FSA works the opposite way: unused money is typically forfeited at year end. You can let your HSA grow as a savings account and draw on it for medical expenses whenever you choose. Many people use their HSA as a retirement savings tool, letting the balance grow tax-free for decades.

What Happens When You Change Jobs

When you leave your job, your HSA goes with you. The IRS puts it plainly: "An HSA is 'portable.' It stays with you if you change employers or leave the work force." The account is yours, and you keep the balance and continue to own it. If your new employer offers an HSA, you can transfer your balance to their plan, or you can keep your HSA with your previous provider and continue managing it. You can also leave your HSA with the original provider indefinitely, even if you never work there again. Unlike an FSA, there is no forfeiture or transfer deadline.

HSA After You Turn 65

Once you turn 65 and enroll in Medicare, you can no longer make new contributions to an HSA. However, you can still withdraw funds from your existing HSA balance for any qualified medical expense without penalty. The IRS is specific about the cutoff: "there is no additional tax on distributions made after the date you are...reach age 65". If you withdraw money for non-medical expenses after age 65, you pay income tax on the withdrawal but no penalty (before age 65, non-medical withdrawals are taxed and penalized).

Where Burst fits

Some purchases are only reimbursable with a letter of medical necessity: gym memberships, massage, fitness equipment, sleep and recovery products, and similar. Burst writes the letter and files the claim for $35, refunded if no letter is issued or the claim is denied. See how a letter works.

Frequently asked questions

Do I need an HSA to use a Letter of Medical Necessity?

No. A Letter of Medical Necessity works with any FSA, HSA, or HRA. Burst issues letters that help you get reimbursement from whichever account you have. If you need a letter, you can request one regardless of your account type.

What is the difference between an HSA and an FSA?

An HSA requires enrollment in a high-deductible health plan. An FSA is available to employees of most companies, regardless of insurance type. An HSA balance carries forward with no deadline to spend it, while an FSA is typically forfeited if unused by year end. If you leave your job, you keep your HSA but lose your FSA balance. Read the full comparison.

Can I use my HSA for expenses from previous years?

Yes. You can use HSA funds to reimburse yourself for any qualified medical expense incurred in any year, as long as you were eligible when the expense occurred. There is no time limit for reimbursement, as long as you can document the expense.

What happens to my HSA if I stop being enrolled in an HDHP?

Your HSA stays with you and you keep the balance. You cannot make new contributions once you are no longer enrolled in an HDHP, but you can continue to withdraw funds for any qualified medical expense. If you re-enroll in an HDHP later, you can resume contributions.

Can I invest the money in my HSA?

Many HSA providers allow you to invest your balance in stocks, bonds, mutual funds, or other investments. This is optional, and you can keep the money in cash if you prefer. Check your HSA provider's offerings to see what investment options are available.

Can I withdraw money from my HSA for non-medical expenses?

Yes, you can withdraw money for any reason. However, if you are under 65 and withdraw funds for non-medical expenses, you pay income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw for any reason and only pay income tax, with no penalty.

Keep reading: What's an FSA?, What's the Difference Between an HSA and an FSA?, HDHP and HSA: How the Pairing Works, What Can You Buy With an HSA?, and all guides on this topic.

Sources

• IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (HSA eligibility requirements, HDHP definition, contribution limits, catch-up contributions, account ownership, qualified medical expenses, withdrawal rules for non-medical expenses before and after age 65, and the requirement that HSA funds must be spent on eligible expenses)

• healthcare.gov Glossary: High Deductible Health Plan (HDHP) (Health Savings Account and high-deductible health plan definitions, eligibility requirements, and general overview of how HSAs function)

• Revenue Procedure 2025-19 (IRS), 2026 HSA and HDHP Inflation Adjustments (2026 HSA contribution limits ($4,400 self-only, $8,750 family), up from $4,300 and $8,550 in 2025)