The HSA Benefits Most People Never Use

If you have a health savings account, there's a good chance you're only utilizing about a third of its capabilities. Most people think of an HSA as a place to park money for copays, prescriptions, and doctor visits. Swipe the debit card, then forget about it. That's not exactly wrong, but there's a better way to use it.

We touched on HSAs in a blog post a few years back, but we wanted to provide more detail and updates, especially with some recent rule changes. Whether you're a business owner picking your own health coverage, someone building toward an early retirement, or just trying to figure out what to do with the account sitting in your benefits portal, here's what an HSA can actually do for you.

The Triple Tax Advantage

You've probably heard the phrase "triple tax advantage". It's not just marketing fluff, it's a true benefit of an HSA. It's genuinely one of the only accounts in the tax code that works this way.

First, the money you contribute reduces your taxable income, either through a payroll deduction, or as an adjustment to income if you contribute outside of payroll. Second, the balance grows tax-deferred, meaning you don't pay tax on any investment gains while the money sits in the account. Third, when you withdraw funds for qualified medical expenses, that withdrawal is tax-free.

No other account combines all three like this. A 401(k) or traditional IRA gets you the deduction and the tax-deferred growth. A Roth IRA gets you the tax-deferred growth and tax-free withdrawals. The HSA is the only one that offers all three, as long as the money comes out for qualified medical expenses.

A Meaningful Rule Change for Solopreneurs and Business Owners

For years, one of the biggest limitations of the HSA was that you had to be enrolled in a qualifying high-deductible health plan, and a lot of the more affordable marketplace plans didn't qualify because their deductibles were too high. That kept a lot of self-employed people and small business owners out of HSA eligibility, even when those lower-premium plans were otherwise a good fit for their budget.

Luckily, that all changed starting in 2026. Bronze and Catastrophic ACA marketplace plans are now treated as HSA-eligible high-deductible plans. If you're a solopreneur or small business owner buying your own coverage on the marketplace, this is worth a second look even if you ruled out an HSA a few years ago.

Eligibility still comes with a few standard requirements. You can't have other non-HDHP coverage, you can't be enrolled in Medicare, and you can't be claimed as a dependent on someone else's return. If you're not sure whether your plan qualifies, it's worth confirming before you open or fund an account.

Using HSA Funds for Long-Term Care

Your HSA isn't limited to doctor visits and prescriptions. You can use HSA funds to pay premiums on a qualified long-term care insurance policy. There is an IRS-set limit on the amount of LTC premiums that qualifies for tax-free HSA distributions, and that limit increases with your age each year. You can also use HSA funds in place of LTC insurance, using the HSA to directly pay for qualified long-term care services.

The cost of long-term care is one of the most underestimated expenses that families face. Having an HSA balance you've built up over the years can do more for you than you expected by greatly increasing your options. We wrote more about what long-term care actually costs and how it fits into retirement planning in our blog on the sandwich generation caring for aging parents.

Paying Medicare Premiums with HSA Funds

Once you're enrolled in Medicare, you can't contribute to an HSA, but you can still use the money that's already in there. Medicare Part B premiums, Part D premiums, and Medicare Advantage premiums are all qualified expenses for tax-free withdrawals from an HSA. Medigap premiums don't qualify.

This can be a particularly useful strategy if you're concerned about IRMAA surcharges, the higher Medicare premiums that kick in once your income crosses certain thresholds. Not only are you using funds that have experienced compound growth to pay the higher premiums, but the withdrawals themselves won't count as income for future IRMAA calculations. If you paid those charges from a taxable or pre-tax account instead, you'd likely have to pull out extra money to cover the taxes on that withdrawal, which could increase your IRMAA surcharge a couple of years down the road.

Using Your HSA as a Retirement Income Tool

This is where an HSA starts to look less like a medical account and more like a retirement account in disguise. If you don't need to spend your HSA funds as you go, you can let the balance continue to compound and grow, then use it strategically later in life.

Before age 65, withdrawals for qualified medical expenses stay tax-free, with no time limit on when you reimburse yourself. You can pay for a medical expense out of pocket today, keep the receipt, and reimburse yourself from the HSA years later, still tax-free. While this can be great for anyone in retirement, it can be especially great for early retirees. Not only can you use the HSA funds to pay for health insurance premiums during your early retirement years, but you can also reimburse prior medical expenses if you need extra cash. This helps give you more control over your taxable income, and can help you qualify for the premium tax credit.

After age 65, the account gets more flexible: you can withdraw funds for any purpose, not just medical expenses, and simply pay ordinary income tax, similar to a traditional IRA. There's no early withdrawal penalty at that point, even for non-medical expenses.

Together, these elements make an HSA one of the more flexible pieces of a retirement income plan, particularly for bridging healthcare costs in the years before Medicare eligibility.

Portability

Unlike a flexible spending account, which typically resets at the end of the year or disappears when you leave a job (we touched on the "use it or lose it" nature of FSAs in our year-end tax checklist), an HSA belongs to you. It moves with you from job to job, stays intact if you become self-employed, and never expires. There's no deadline to spend the balance down, and no employer can take it back.

This is part of why it's worth treating your HSA less like a spending account and more like a long-term savings vehicle, especially if your budget allows you to cover smaller medical expenses out of pocket rather than tapping the account right away.

What Happens to an HSA When the Owner Dies

The outcome here depends entirely on who you've named as beneficiary.

If your spouse is the named beneficiary, the HSA transfers to them and becomes their own HSA, with no immediate tax consequence. They can continue using it exactly as you did.

If anyone other than a spouse is named, the account stops being an HSA, and the fair market value becomes taxable income to that beneficiary in the year you pass away. However, the beneficiary can reduce the taxable amount by paying any of your qualified medical expenses within a year of your death. These expenses have to be paid anyway, and an HSA is one of the most favorable ways to do so.

If no beneficiary is named, the balance generally becomes taxable income on your final tax return. This is a good reason to make sure your HSA beneficiary designation is current, particularly if it's changed since you opened the account.

A Few Other Things Worth Knowing

A few more details are worth knowing. The HSA contribution limit for family coverage is a household figure, and you have to have family HDHP coverage in order to contribute up to that limit. HSAs are always individual accounts, so it's recommended that you and your spouse each have your own HSA, and that you split the annual limit between your two accounts in whatever way makes sense for you. One thing to keep in mind: if either spouse is 55 or older, that spouse's catch-up contribution has to go into their own HSA, it can't be added to the other spouse's account.

If you have family HDHP coverage, you can use HSA funds for a spouse's or dependent's qualified medical expenses, even if that family member has separate coverage of their own. Also, for those of you with adult children who are covered by your health insurance but are ineligible to be claimed as your dependent, they're also able to open and contribute to their own HSA. You'll just want to confirm with your tax professional how much your adult child is able to contribute.

This account also requires some bookkeeping. Keep receipts for anything you plan to reimburse yourself for later, since the IRS can ask for documentation if you're ever audited. There's currently no limit on how far back you can reimburse yourself for. The main requirement is that you were covered by an HSA-eligible plan when the qualified medical expense was incurred.

The Bottom Line

An HSA is one of the few accounts where the rules genuinely favor patience. The more you let it accumulate and grow, the more it can do for you later, whether that's covering long-term care, paying Medicare premiums, or simply serving as another source of tax-free retirement income. If you haven't looked closely at your HSA strategy in a while, particularly with the new marketplace eligibility rules for 2026, now's a reasonable time to revisit it.

Common Questions About HSAs

What is the triple tax advantage of an HSA?

Contributions reduce your taxable income, the balance grows tax-deferred, and withdrawals for qualified medical expenses are tax-free. No other account offers all three benefits together.

Can I use my HSA to pay for long-term care insurance?

Yes. You can use HSA funds tax-free to pay premiums on a qualified long-term care insurance policy, up to an age-based limit set by the IRS each year, and to pay directly for qualified long-term care services.

Can I use my HSA to pay Medicare premiums?

Yes, once you're enrolled in Medicare. HSA funds can cover Part B, Part D, and Medicare Advantage premiums tax-free, though not Medigap premiums. You can no longer contribute to an HSA once you're enrolled in Medicare.

What happens to my HSA if I don't spend it?

Nothing. Unlike an FSA, HSA balances roll over every year with no expiration and no "use it or lose it" rule. The account stays yours for as long as you want to keep it.

What happens to my HSA when I die?

If your spouse is the named beneficiary, the account transfers to them tax-free as their own HSA. If anyone else is named, the balance becomes taxable income to that person, reduced by any of your qualified medical expenses paid within a year of your death.

Are Bronze and Catastrophic marketplace plans HSA-eligible now?

Yes. Starting in 2026, Bronze and Catastrophic ACA marketplace plans are treated as HSA-eligible high-deductible health plans, opening up HSA access to many self-employed individuals and small business owners who previously didn't qualify.