Health Savings Accounts (HSA): Overview

A Health Savings Account is a portable, tax-favored savings account combined with a qualifying high deductible health plan (HDHP) that allows you to fund health care expenses with pre-tax money. Your deposits to a Health Savings Account reduce your taxable income, and withdrawals are never taxed as long as funds are used to pay for qualified medical expenses.

HSAs are similar to IRAs, but even better:

• Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 20 percent penalty if done prior to age 65.
• Any HSA funds not used each year remain in the account (no “use it or lose it”), and earn interest tax-free to supplement medical expenses at any time in the future.
• Like an IRA, the account belongs to you, not your employer. But unlike an IRA, your employer CAN contribute to your HSA.

How Health Savings Accounts Work

HSAs allow you to reduce your federal taxable income by contributing up to $4,500 for self-only coverage or $9,000 for family coverage in 2027, plus a $1,000 catch-up contribution if you are 55 or older. There is no minimum deposit, but whatever you deposit into your account by April 15th is an “above the line” tax deduction for the previous year’s income taxes, and the money is still yours to spend tax free, as long as you spend it on qualified medical expenses.

PPO Plan vs HSA Plan

Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical PPO plan with a $500 or $1,000 deductible. The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year.

However, with an HSA, you may have a higher major medical deductible, and you won’t enjoy office visit and prescription co-pay benefits typical of PPO and HMO plans. Still, for the large majority of consumers, HSAs produce a net financial gain.

Consider these HSA Advantages over PPO Plans:

• Reduced health insurance premium
• Reduced rate of increase in health insurance premium
• Taxable income reduced by HSA deposits
• Out-of-pocket health care expenses paid with pre-tax funds
• Enhanced preventive care benefits
• A new source of long-term savings

How an HSA saves you money, and what California does differently

An HSA gives you three federal tax advantages: contributions reduce your federal taxable income, the money grows tax free, and withdrawals for qualified medical expenses are tax free. Pair that with the lower premium of a high deductible plan and the combination works well for a lot of people.

The California catch

California does not conform to federal HSA tax law. This is the single most important thing a Californian can know about an HSA, and most national websites and calculators leave it out. In practice:

• Your HSA contributions are not deductible on your California return. They reduce your federal taxable income only.
• Interest, dividends and capital gains earned inside your HSA are taxable by California every year, even though they grow tax free federally.
• You have to track a separate California basis for the account and report the investment income on your state return annually.

An HSA is still worth having in California for most people who qualify. The federal deduction, tax free growth at the federal level and tax free qualified withdrawals are substantial, and the account is yours to keep. But the savings are smaller here than a national HSA calculator will tell you, and if your HSA is heavily invested you will have a state reporting obligation every year. Talk to your tax preparer before you open one.

Two more things people get wrong

• Withdrawals that are not for qualified medical expenses before age 65 are taxed as income plus a 20% penalty. The penalty is waived at 65, or on disability or death.
• Enrolling in Medicare, any part, ends your ability to contribute. Stop contributions the month your Medicare coverage begins. Part A can be granted retroactively up to six months, which catches out a lot of people who work past 65.

New for 2026: Bronze and minimum coverage plans offered through Covered California now qualify as HSA-compatible high deductible health plans, which was not the case before January 1, 2026. That means you can pair a subsidized on-exchange Bronze plan with an HSA. Ask us whether that fits your situation.

2027 HSA Contribution Limits

The maximum contribution and the minimum deductible for HSAs are set by the IRS each year. These are the 2027 figures.

	2027	2026
HSA contribution limit	Self-only: $4,500 Family: $9,000	Self-only: $4,400 Family: $8,750
Catch-up contribution (age 55+)	$1,000	$1,000
Minimum HDHP deductible	Self-only: $1,750 Family: $3,500	Self-only: $1,700 Family: $3,400
Maximum HDHP out-of-pocket	Self-only: $8,700 Family: $17,400	Self-only: $8,500 Family: $17,000

Source: IRS Revenue Procedure 2026-24. The age 55+ catch-up amount is set by statute and is not indexed for inflation. Contributions for a tax year can be made up to that year’s filing deadline, generally April 15 of the following year.