Who Do HSAs Make Sense For?

A health savings account (HSA) can help shield money from taxes while reserving those funds for specific medical expenses. If you have a high deductible health care plan, your employer may offer a health savings account as a way to keep medical expenses down. You will make contributions via payroll, though employers generally subsidize a majority of the cost. While HSAs are attractive in terms of costs and taxes, they may not be for everyone.

Need help with your HSA or other investment accounts? Speak with a financial advisor who serves your area today.

What Is an HSA?

An HSA is a tax-advantaged savings account available to those enrolled in high-deductible health plans (HDHPs). They have risen in popularity over the past few years because, in combination with HDHPs, they can vastly reduce the monthly premium you and your employer pay. A higher deductible means lower premiums, and that could mean huge savings for you and your employer.

The basic premise behind the HDHP/HSA combo is pretty simple: You cover the (relatively) small things, like when you get sick and need antibiotics. Meanwhile, insurance will cover the big things, like broken bones, after you meet your deductible.

This way, you are insuring against things that are unlikely to happen while paying out of pocket for minor medical issues without involving a third party like an insurance company.

Who Do HSAs Make Sense For?

An HSA may be worth considering for people who can afford the potential out-of-pocket costs of their health plan while setting aside money for future care. If you rarely need to see the doctor, you can take your employer’s contribution and the monthly premium savings and add them straight to your HSA account every year. After a few years, you could potentially have a large nest egg built up that is tax-free when used for medical expenses.

The other attractive feature of HSAs is that the money stays with you (not your employer), and you can use it at any point in your life. So, even if you’re the model of perfect health right now, you can invest that money for 30-40 years and then use it later when you’re retired. Money in your HSA can even be applied to deductibles, coinsurance and copays if you decide to switch back to a traditional plan in the future.

On the other hand, HSAs might not make sense if you have some type of chronic medical condition. In that case, you’re probably better served by traditional health plans. HSAs might also not be a good idea if you know you will need expensive medical care in the near future.

When you have a copay, you know how much it will cost to visit the doctor, but it can be difficult to find out the cost of medical care when you are paying yourself. Also, the desire to keep money in an HSA may prevent some people from seeking medical treatment or emergency department care when they really need it. Plus, if you take money out of your HSA for non-medical expenses, you will have to pay taxes on it.

How HSAs Can Help You Save

A lot of people are scared to switch to HSAs because of the fear of getting sick and having to pay that big deductible. But it’s important to consider the premium savings and employer contribution (if applicable).

Your monthly savings are generally pretty significant when you switch from a traditional PPO/HMO plan to an HSA/HDHP combo. You can then add those savings to your HSA every year. In addition, you can contribute money to your HSA so that if there is a gap, you can pay for it with tax-free dollars.

Ultimately, HSAs have more risk, but also more potential upside. In fact, HSAs are the only retirement accounts that are triple tax-free: The money you put in is tax-free, the money you take out is tax-free and the investment gains are tax-free when you use the withdrawals for qualified medical expenses. Additionally, contributions are generally tax-deductible or excluded from income, while investment earnings can accumulate without federal income tax. State tax treatment may differ.

You can calculate your yearly savings by opting for the HSA by simply adding up the employer contribution and premium savings, and then comparing that to the HDHP deductible. For a more complete comparison, also account for the traditional plan’s deductible, copays, coinsurance and each plan’s annual out-of-pocket maximum. That way, you know what your breakeven point is, or how long you have to go without any major medical care before the HSA/HDHP combo saves you money.

How to Compare HSA Plans Using 2026 & 2027 Limits

The contribution limit is another factor worth considering. It determines how much can go into the account with federal tax benefits each year.

For 2026, the IRS has set the following limits for HSA contributions and qualifying HDHPs:

For 2027, the limits are as follows: ¹

Eligible individuals age 55 or older can contribute an additional $1,000 annually. Employer contributions count toward the contribution limit, and people who qualify for only part of the year may have a lower limit. Enrolling in Medicare generally ends eligibility to make new HSA contributions, although existing balances remain available for qualified expenses.

Beginning in 2026, certain bronze and catastrophic health plans also qualify for HSA purposes under expanded federal rules, even if they do not meet the usual HDHP deductible or out-of-pocket requirements. Other eligibility restrictions still apply.

An Example

For example, suppose an employer offers two self-only plans. The traditional plan costs $300 per month in employee premiums, while the HSA-eligible plan costs $200 per month. The employer also contributes $600 annually to the HSA.

The HSA option would provide $1,200 in annual premium savings plus the $600 employer contribution, creating an $1,800 advantage before accounting for differences in medical expenses. If the HSA plan requires $2,500 more in annual out-of-pocket spending than the traditional plan, however, the employee would be $700 worse off that year under these assumptions.

Comparing actual premiums, expected medical costs and the maximum amount you might have to pay during an expensive year can help determine whether the HSA option fits your budget.

What You Can Use HSA Funds For

HSA funds can be used to pay for qualified medical expenses for the account holder, their spouse and any dependents. The following are some examples of qualified medical expenses:

• Doctor visits, including payments for primary care, specialists and consultations
• Prescription medications, with costs for prescribed drugs fully covered with HSA funds
• Medical procedures, including surgeries, hospital stays and diagnostic tests
• Dental care, including expenses like cleanings, fillings, braces and dentures.
• Vision car, including costs for eye exams, glasses, contact lenses and corrective surgeries like LASIK
• Therapies, including physical therapy, chiropractic care and mental health services
• Medical equipment, including items like wheelchairs, crutches and hearing aids
• Long-term care expenses, including certain qualified long-term care services, subject to IRS requirements.
• Over-the-counter medications, including pain relievers, allergy medications and other non-prescription drugs
• Health insurance premiums under specific conditions, such as COBRA coverage or while receiving unemployment benefits

HSA vs. HMO

An HMO, or health maintenance organization, is a network of medical care providers that you get access to at a discounted rate if you’re part of the network’s insurance plan. When you select an HMO, you’ll likely get a better price than an HDHP. However, you will also be much more restricted in what doctor you can see because expenses for out-of-network physicians or hospitals won’t typically be covered.

An HMO will often have a very low deductible or none at all. Some expenses might be covered under an HMO if your doctor refers you to an out-of-network facility. Check out our resource on HSA vs. HMO to learn more.

Bottom Line

Before making the switch, look at how much you spent on healthcare over the last few years to see if an HSA makes sense for you. It may be that a traditional healthcare policy is the better choice. Or a health reimbursement account (HRA) may make more sense, especially since you can pair it with certain HSA-compatible arrangements or an HDHP, depending on the HRA’s coverage and reimbursement rules. Only a careful assessment of your recent medical expenses and current health condition can give you the insight you need to make a good choice.

Tips on Healthcare

• Consider working with a financial advisor as you update your healthcare plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. Then, you can have a free introductory call with your matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Another important thing to think about is life insurance. Use SmartAsset’s life insurance calculator to see how much you need. That way, you can make any adjustments you need to.

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