Health savings account (HSA)

A health savings account is a personal savings and investment account paired with a high-deductible health plan (HDHP). Only someone covered by a qualifying HDHP — and not covered by other disqualifying health coverage or enrolled in Medicare — is eligible to contribute. The account belongs to the individual, not the employer, so it moves with the accountholder between jobs.

HSAs carry an unusual triple tax advantage. Contributions are deductible (or made pre-tax through payroll), the balance grows tax-deferred and can typically be invested in securities once the custodian's minimum cash balance is met, and withdrawals used for qualified medical expenses come out entirely tax-free. Withdrawals for non-medical purposes are taxable as ordinary income and, before a specified age, carry an additional penalty; after that age the penalty no longer applies, though income tax still does. Annual contribution limits are set by the IRS and adjusted periodically, with a higher limit for family coverage and an extra catch-up amount for older accountholders.

Unused HSA balances roll over indefinitely, which distinguishes them from flexible spending accounts (FSAs), where unused funds are generally forfeited at year end. That permanence lets an HSA function as a supplemental retirement vehicle: an accountholder can pay current medical costs out of pocket, leave the account invested for decades, and draw on it tax-free for medical expenses later in life.

HSAs appear on the Series 65 and Series 66 exams in the special accounts material, where you should know the HDHP eligibility requirement, the tax treatment of contributions and withdrawals, and how an HSA differs from an FSA. They also appear on life and health insurance licensing exams alongside Section 125 cafeteria plans and other limited health policies.