What is a Health Savings Account (HSA)?

Business owners know the best way to attract and retain employees is to offer them health benefits that can save them money. HSAs are a smart addition to your benefits package because they help employees manage out-of-pocket healthcare costs and save for future medical needs. They can also complement qualifying group health plans or a CHOICE Arrangement, formerly known as an individual coverage health reimbursement arrangement (ICHRA), if designed correctly.

Knowing how HSAs work, who qualifies, and the tax rules for contributions and withdrawals can help employers decide whether this popular health benefit is right for their company and employees.

In this blog post, you’ll learn:

• How HSAs work, including contribution limits, tax advantages, and eligibility requirements.
• The benefits and limitations of HSAs and how to use funds for qualified medical expenses.
• How to pair an HSA with a CHOICE Arrangement (formerly ICHRA) to support flexible employee health benefits.

What is a health savings account (HSA)?

A health savings account (HSA) is an individually owned tax-advantaged account designed to help people pay for current and future qualified medical expenses. To contribute to an HSA, individuals must enroll in an HSA-qualified health plan and meet other eligibility requirements.

Both employers and eligible individuals can contribute to an HSA. Account holders can use the funds to pay for eligible healthcare expenses, save for future medical costs, or invest a portion of the balance (if the HSA provider offers investment opportunities).

Unlike a flexible spending account (FSA), HSA funds don’t expire at the end of the year. Unused HSA money remains in the account indefinitely, allowing the balance to grow over time.

HSAs are also portable. The account belongs to the individual, not the employer, so the account holder keeps the money when they leave a job, retire, or change health insurance plans.

How does an HSA work?

An HSA is not health insurance. Instead, it helps pay for eligible expenses, while your health insurance plan covers medical services.

Here's how it works:

1. Enroll in qualifying health coverage. To contribute to an HSA, you’ll need HSA-qualified coverage. While this is typically a high deductible health plan (HDHP), all on-exchange Bronze and catastrophic plans and their same off-exchange versions now also qualify.
2. Open an HSA. Choose a bank, credit union, or other HSA provider. An employer may offer an HSA, but individuals can also open an account on their own, regardless of employment status.
3. Contribute money. The account holder, their employer, or both can contribute to the HSA, as long as combined contributions don't exceed the annual maximum limit.
4. Pay for qualified healthcare expenses. Use HSA funds to pay for eligible out-of-pocket medical costs. Most administrators will provide account holders with a debit card so they can easily pay for expenses at the time of service.
5. Save or invest the remaining balance. Unused HSA funds roll over each year. Depending on your provider, you may be able to invest some of your balance for future healthcare expenses.

What are the HSA contribution limits for 2027?

The IRS sets annual HSA contribution limits, which vary based on whether an individual has a self-only or family insurance policy. The limits include contributions from both the account holder and their employer.

As outlined in IRS Rev. Proc. 2026-24, the annual HSA limits for 2027 are as follows¹:

For example, an employee with self-only coverage who contributes $3,000 to an HSA in 2027 and receives $1,000 from their employer has contributed $4,000 in total. They could generally contribute another $500 for the year if they remain eligible and no other contributions apply.

Contributions above the maximum limit may be subject to an excise tax.

Do HSAs have tax advantages?

Yes, HSAs are federal triple tax-advantaged. We’ll go into each in more detail below.

1. Tax-advantaged contributions

Contributions an eligible individual makes directly to the HSA are deductible on their federal income tax return. Employer contributions are also exempt from the employee's federal taxable income.

Payroll contributions made to the account through an eligible Section 125 cafeteria plan are exempt from Social Security and Medicare taxes. However, individual contributions aren’t exempt.

2. Tax-free interest and investment growth

Money held in an HSA can earn interest or investment returns. Account earnings aren't subject to federal income tax while they remain in the account.

Depending on the HSA provider, account holders may be able to invest funds in options such as mutual funds once they meet the provider's balance requirements.

3. Tax-free withdrawals

Deposits are made pre-tax, and HSA withdrawals used for qualified medical expenses are exempt from federal income tax or penalties. The interest they earn on the account accumulates tax-deferred year after year.

Account holders should keep receipts and records in case they need to substantiate qualified withdrawals.

Who is eligible for an HSA?

HSA eligibility depends on your health coverage and other specific circumstances.

In general, you must meet the following requirements to contribute to an HSA:

• You’re at least 18 years old.
• You have qualifying HSA-eligible health coverage.
• You can open and contribute to an HSA if you obtain qualifying coverage through an employer or purchase an eligible plan yourself on the individual market.
• You don’t have another disqualifying health plan.
• You can’t have coverage from any non-HSA-qualified health plan, including coverage from a spouse or parent. Any health reimbursement arrangements (HRAs) must be limited-purpose, premium-only, or post-deductible, and FSAs must also be limited-purpose or post-deductible.
• You aren't enrolled in Medicare Parts A or B.
• You aren’t enrolled in Medicaid.
• No one can claim you as a dependent on their federal income tax return.

Married couples share the annual family HSA contribution limit. However, each spouse must maintain a separate HSA if both wish to contribute.

What medical expenses are HSA-eligible?

Tax-free HSA funds can pay for qualified medical expenses outlined in IRS Publication 502 incurred by the account holder, their spouse, and their eligible dependents². These expenses include many healthcare costs that a standard health insurance plan doesn't fully cover.

Common eligible medical expenses include:

• Cost-sharing amounts, such as deductibles, copayments, and coinsurance
• Prescription medications
• Doctor visits
• Eligible over-the-counter medications and medical supplies
• Dental exams, fillings, and qualifying costs
• Vision expenses, such as eye exams, prescription glasses, and contact lenses
• Eligible mental health services and medical treatments
• Certain medical equipment and diagnostic services

In most cases, health insurance premiums aren't qualified HSA expenses. Exceptions include certain long-term care insurance premiums, continuation coverage such as COBRA, health coverage while receiving unemployment compensation, and Medicare premiums after age 65. As of January 1, 2026, direct primary care (DPC) membership fees are HSA-eligible costs, due to H.R. 1.³

If you're younger than 65 and withdraw HSA funds for nonqualified expenses, the withdrawal is subject to income tax, and you’ll also pay an additional 20% penalty tax.

Which health plans are eligible for an HSA?

Those who wish to contribute to an HSA must enroll in an HSA-qualified HDHP. HDHPs require enrollees to pay more out of pocket before their insurance begins covering many medical costs (other than preventive costs), in exchange for lower premiums.

An HSA-qualified HDHP must meet these requirements in 2027:¹

Effective January 1, 2026, all on-exchange Bronze and catastrophic health insurance also count as HSA-qualified plans. Any mirrored off-exchange versions of those plans also qualify. Additionally, individuals with DPC aren’t disqualified from opening and contributing to an HSA.

What are the advantages and disadvantages of an HSA?

HSAs can help people pay current healthcare costs while saving for the future. However, they aren't necessarily the right fit for everyone.

Below are a few advantages of HSAs:

1. Eligible contributions, account growth, and qualified withdrawals can have tax advantages.
2. Unused funds stay in the account from year to year. There's no vesting schedule or tax penalties if individuals don’t spend their HSA money.
3. Account holders can keep their HSAs and all unused funds, including employer contributions, when they change jobs or health insurance plans.
4. Individuals can save or invest funds for future healthcare costs, including eligible expenses in retirement.
5. Many medical, dental, vision, and prescription expenses qualify as HSA-eligible healthcare costs.

Here are some potential disadvantages of HSAs:

• To open or contribute to an HSA, an individual must enroll in HSA-qualifying health coverage, which typically has a high deductible.
• People with complex or recurring medical needs may find a plan with a lower deductible and higher premiums a better fit than an HDHP, but would make them ineligible for an HSA.
• Members may need to pay more out of pocket before their plan covers many medical services.
• HSAs have annual contribution limits. All individual and employer contributions count toward the limit, which the IRS updates every year.
• Withdrawals for non-qualified expenses before an account holder turns 65 are subject to income taxes plus a 20% penalty.
• Investment options vary by HSA provider, with no guarantees on returns.

Can you pair an HSA with a CHOICE Arrangement?

Yes. Employers can pair an HSA with a CHOICE Arrangement (formerly known as an ICHRA), as long as the arrangement meets the proper compliance requirements.

A CHOICE Arrangement allows employers to provide tax-free contributions toward employees' individual health insurance premiums and, sometimes, qualified out-of-pocket medical expenses. This lets employees choose the individual health plan that works for them instead of a one-size-fits-all group plan selected by their employer.

When coordinated properly, these two benefits serve a dual purpose: the CHOICE Arrangement helps employees pay for their individual coverage and the HSA helps them save and pay for eligible healthcare costs.

Employers can compliantly pair a CHOICE Arrangement with an HSA by doing the following:

1. Offer a “limited-purpose” CHOICE Arrangement. Employers can limit their CHOICE Arrangement to reimbursing employees only for health costs that are exempt from the HSA deductible requirement. This means your CHOICE Arrangement must only allow employees to pay for health insurance premiums, long-term care premiums, preventive services, and dental and vision care.
1. Employees can use their HSA to pay for other out-of-pocket medical costs the limited-purpose CHOICE Arrangement doesn’t cover. However, they still must enroll in an HSA-qualified HDHP to contribute to the account.

• Offer a post-deductible CHOICE Arrangement. With this option, the CHOICE Arrangement only reimburses employees for non-premium out-of-pocket medical expenses after they meet their health plan’s annual deductible.

• Offer a premium-only CHOICE Arrangement. You can also limit a CHOICE Arrangement to only paying for qualified health insurance premiums. This is a popular option among employers, with 61% of Remodel Health CHOICE Arrangement customers offering a premium-only arrangement as of February 2026.

The ICHRA Final Rules allow employers to offer both an HSA-compliant offering to those with an HSA and a non-HSA-compliant offering to those without an HSA: “An employer that offers employees in a class of employees a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible does not fail to satisfy the same terms requirement provided both types of individual coverage HRAs are offered to all employees in the class on the same terms.”⁴

If you’re considering offering both an HSA and a CHOICE Arrangement at your company, the most important step is to coordinate the two benefits carefully. Work with a benefits specialist or the team at Remodel Health to ensure your CHOICE Arrangement’s plan design can work compliantly with an HSA.

Conclusion

A health savings account can be a great way for individuals to save on healthcare costs while receiving tax benefits. However, your staff can get even more value by pairing an HSA with a personalized CHOICE Arrangement. When structured properly, these two benefits complement each other, giving employees more financial peace of mind when paying monthly insurance premiums and other out-of-pocket medical expenses.

If you need help coordinating your benefits, Remodel Health can help you design a CHOICE Arrangement strategy that works with an HSA, so you don’t have to worry about making a mistake. Book a call with us today to learn more!

References

1. IRS Rev. Proc. 2026-24
2. IRS Publication 502
3. H.R.1 – One Big Beautiful Bill Act
4. Health Reimbursement Arrangements and Other Account-Based Group Health Plans

This article is for educational purposes. It is not legal or tax advice. Please consult with a qualified tax or legal professional for specifics about your business.