HSA | Health Savings Account
Health savings accounts (HSAs) are a growing trend in health care. An HSA is a tax-exempt savings account established for the purpose of paying for the qualified medical expenses of an individual and/or his or her spouse and tax dependents. HSAs are designed to provide eligible individuals with the following federal tax benefits:
- HSA contributions are tax-free.
- Interest and other earnings on HSA contributions accumulate tax-free.
- Amounts distributed from an HSA for qualified medical expenses are tax-free as well.
HSA Basics
Non-taxable contributions
HSA contributions are non-taxable, and can be made by the HSA owner, an employer, a family member or any other person for months during which the owner is HSA-eligible.
Accumulate earnings and interest
HSA funds, including interest and earnings, accumulate tax-free from year to year. HSAs are not subject to the “use it or lose it” rule applicable to health flexible spending accounts (FSAs).
Annual contribution limits
Annual limits apply to HSA contributions. The amount of the annual limit is federally mandated, and depends on whether the HSA owner has individual or family HDHP coverage.
Reporting responsibility
HSAs are controlled and owned by the individual or employee. HSA owners are responsible for annually reporting HSA contributions and distributions to the Internal Revenue Service (IRS) as an attachment to their IRS Form 1040 (U.S. Individual Income Tax Return).
Your HSA stays with you
HSAs are portable, meaning individuals keep their HSAs even if they change jobs, change medical coverage or make other life changes.
It’s an inheritable asset
HSAs are an inheritable asset. If a surviving spouse is the beneficiary, the spouse becomes the owner of the account and can use it as if it were his or her own HSA. For other beneficiaries, the account will no longer be treated as an HSA, and will pass to a beneficiary or become part of the deceased individual’s estate.
Who is eligible for an HSA?
HSAs are offered in combination with high deductible health plans (HDHPs). To be HSA-eligible, an individual must be covered under a qualified HDHP and not also covered by another health plan that is not an HDHP (with a few exceptions, including disability, dental care, vision care and long-term care insurance). HDHPs generally have lower monthly premiums and higher deductibles than traditional health plans.
HSAs can cover medical expenses until the HDHP deductible is reached. The idea of this design is that the HSA pays for routine, smaller health expenses, while the HDHP offers protection in the event of a catastrophic medical expense, such as an unexpected illness, injury or hospitalization.
Because HSA amounts are non-forfeitable, amounts contributed to an HSA can increase savings for future health care needs, even into retirement.
In general, money placed into an HSA can be withdrawn at any time. Any HSA withdrawal used for a purpose other than to pay for qualified medical expenses is taxable as income and subject to an additional 20 percent penalty. After an individual reaches age 65, the additional penalty tax does not apply to HSA withdrawals.
What’s an FSA?
A flexible spending account (FSA) is an account in an employee’s name that reimburses the employee for qualified health care or dependent care expenses. It allows an employee to fund qualified expenses with pre-tax dollars deducted from the employee’s paychecks.
