Health Savings Account
A Health Savings Account is the only account in the Code with three tax locks: money goes in deductible, grows untaxed, and comes out tax-free for medical bills. A family can put in $8,750 for 2026. At a 35% bracket that is about $3,060 of federal income tax kept this year, before any growth.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Families and individuals covered by a high-deductible health plan with no other disqualifying coverage.
- High earners who can pay current medical bills from cash and let the HSA grow.
- Business owners who want to add an HSA contribution to payroll for themselves and staff.
- Anyone 55 or older, who can add a $1,000 catch-up.
Who it's not for
- People on Medicare. Contributions stop once you enroll.
- Families whose health costs make a high-deductible plan a poor fit. The tax savings do not justify the wrong insurance.
- Anyone covered by a spouse's general-purpose health FSA, which can block eligibility.
How it works
Eligibility comes from the insurance, not the account. You must be covered by a qualifying high-deductible health plan, whose minimum deductible and out-of-pocket limits are indexed for inflation each year, and have no other non-qualifying coverage.
For 2026 the limit is $4,400 self-only or $8,750 family, plus $1,000 if you are 55 or older. Contributions through an employer's cafeteria plan also skip payroll taxes. Contributions you make yourself are deducted on your return whether or not you itemize.
Inside the account, money can be invested. Interest, dividends and gains are not taxed while they stay in.
Withdrawals for qualified medical expenses are tax-free at any age. There is no deadline to reimburse yourself, as long as the expense came after the HSA was opened and you keep the receipt. Many owners pay bills from cash today, save receipts, and reimburse themselves years later.
After 65, non-medical withdrawals are taxed as ordinary income with no penalty, much like a traditional IRA. Before 65, non-medical withdrawals are taxed and carry a 20% additional tax.
Illustrative example
Illustrative: a married business owner in the 35% bracket with family HDHP coverage contributes the full family limit for 2026 and pays current medical bills from cash.
- Contribution: $8,750.
- Federal income tax saved: $8,750 x 35% = $3,062.50.
- If contributed through a cafeteria plan and wages are above the $184,500 Social Security wage base, Medicare savings add about $8,750 x 2.35% = $205.63.
- Total first-year federal tax kept: $3,062.50 + $205.63 = $3,268.13.
- Receipts are saved. Future withdrawals against them come out tax-free.
About $3,268 of federal tax kept in year one, with the full $8,750 invested and growing untaxed.
The rules
| Rule | Citation |
|---|---|
| Eligibility requires HDHP coverage and no other disqualifying health coverage. | IRC §223(c)(1) |
| Annual contribution limits, with an additional catch-up at 55. | IRC §223(b) |
| Employer contributions, including through a cafeteria plan, are excluded from income. | IRC §106(d) |
| Distributions for qualified medical expenses are excluded from income. | IRC §223(f)(1) |
| Non-medical distributions before 65 are taxed plus a 20% additional tax. | IRC §223(f)(4) |
Watch-outs
- Medicare enrollment ends eligibility, and Medicare Part A can be retroactive up to six months. Plan the last contribution year carefully.
- Contributions for a month you were not eligible are excess contributions and draw a 6% excise tax each year until removed.
- Receipts are your audit file. A tax-free withdrawal years later needs proof of the expense.
- On death, an HSA passing to anyone other than a spouse becomes taxable to that beneficiary.
What we do
We confirm eligibility month by month, size the contribution across spouses, and set up the payroll route for owners and staff where it saves payroll tax. We report contributions and distributions on Form 8889 and keep a reimbursement log you can produce if asked.
Questions
Can my business pay into my HSA?
Yes for employees through a cafeteria plan. For S-corporation owners with more than 2% ownership, the company's HSA contribution is included in W-2 wages and then deducted on the owner's own return, so the income tax result is the same as contributing directly.
Do I lose unused HSA money at year-end?
No. Unlike an FSA, the balance stays yours and rolls over every year, including if you change jobs.
What counts as a qualified medical expense?
Generally the costs that would qualify as deductible medical care, such as deductibles, copays, dental, vision and prescriptions. Most insurance premiums do not qualify, with limited exceptions.