Three ways HSA cash can sit, one switch people never find, and the taxability question answered.
An HSA is a custodial account, not a savings account. The custodian decides — or sometimes you must elect — whether idle cash earns interest. Many bank HSAs pay a token rate (0.01% is common) and never volunteer better options; most brokerage HSAs sweep cash into an interest-bearing fund automatically.
| Arrangement | Typical rate | What to know |
|---|---|---|
| Default cash, no election | 0% – 0.05% | The trap. Common at bank and employer-chosen HSAs. Ask if interest must be "enrolled." |
| Interest-bearing cash sweep / tiered account | 0.1% – 2% | Rates tier by balance and change without notice. Brokerage HSAs (e.g. Fidelity's ~1.96%) sweep automatically. |
| Credit-union health savings tiers | 0.35% – 3.7% | Often the best verified cash rates, sometimes with balance bands or short-term add-on structures. |
| Invested (mutual funds / ETFs inside the HSA) | market returns | Not interest — market risk and return. The right home for dollars beyond ~1 year of expected medical costs. |
No — interest earned inside an HSA is not taxable, ever, at the federal level. It's not even reportable income, unlike savings-account interest. State treatment follows the federal rule in most states; a handful (e.g. California, New Jersey) tax HSA earnings including interest for state income tax. That tax-free layer is exactly why a 2% HSA sweep can beat a noticeably higher taxable savings rate — see the after-tax math.
The verified ranking.
What the gap is worth on your balance.
$4,400 / $8,750 / $1,000.
The employer-plan wrinkle.
The FSA cousin of this problem — deadlines.
Sister site for FSA owners.