HEALTH SAVINGS ACCOUNT (HSA) -

Health Savings Account (HSA)

Table of Contents

• What Is a Health Savings Account (HSA)?
• How Does an HSA Work?
  • Eligibility
  • HSA Contributions
  • Tax Advantages
  • Account Growth
  • Qualified Medical Expenses
  • Rolling Balances
  • Portability
  • Retirement Savings
• HSA Benefits and Disadvantages
  • Advantages
  • Disadvantages
• FAQ

What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged savings tool specifically designed for individuals who are enrolled in high-deductible health plans (HDHPs). This account allows you to save money on a pre-tax basis to cover qualified medical expenses. HSAs provide multiple tax benefits, such as tax-deductible contributions, tax-free withdrawals for eligible medical costs, and the potential for tax-free growth on investments.

"Health Savings Accounts empower individuals to take control of their healthcare spending while enjoying significant tax advantages."

How Does an HSA Work?

Eligibility

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). Not every HDHP is eligible, so it's critical to verify that your plan meets the requirements established by the IRS.

HSA Contributions

Contributions to your HSA can be made using pre-tax dollars. You can set up contributions through payroll deduction or make direct deposits. Many employers contribute to HSAs as part of their employee benefits, enhancing the savings potential.

Tax Advantages

Contributions made to your HSA are tax-deductible, ultimately reducing your taxable income. Additionally, contributions from your employer typically do not count as gross income for tax purposes.

Account Growth

HSAs offer the unique ability to invest funds, which can lead to growth over time. Earnings from these investments grow tax-free, making HSAs an appealing savings option.

Qualified Medical Expenses

HSA funds can be used tax-free to cover qualified medical expenses such as deductibles, co-payments, prescriptions, and eligible preventive services.

Rolling Balances

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year after year. This feature allows for long-term savings and investment opportunities without the pressure to spend the funds within a specified timeframe.

Portability

HSAs are portable, meaning you retain access to your account even if you change jobs or health plans, or upon retirement. This flexibility makes HSAs an attractive option for many individuals.

Retirement Savings

Once you turn 65, you can withdraw funds from your HSA for non-medical expenses without incurring a penalty. However, keep in mind that such withdrawals are subject to income tax.

HSA Benefits and Disadvantages

Advantages

• Tax Advantages: Contributions are tax-deductible, helping to lower your taxable income, while earnings on investments grow tax-free.
• Flexible Contributions: You can contribute up to the IRS-set annual limit, and individuals aged 55 or older can take advantage of additional "catch-up" contributions.
• Portability: The account belongs to you, allowing you to keep it throughout job changes or health plan transitions.
• Long-Term Savings: Funds can accumulate year after year, providing a reserve for unexpected healthcare expenses.
• Investment Options: Many HSAs allow account holders to invest their funds to enhance savings growth.

Disadvantages

• High-Deductible Health Plan Requirement: To open an HSA, you must have a qualifying HDHP, which can sometimes lead to higher out-of-pocket costs.
• Contribution Limits: IRS sets annual contribution limits, and exceeding these can result in penalties.
• Limited Use for Non-Qualified Expenses: Withdrawals for non-qualified expenses before age 65 incur a hefty 20% penalty, in addition to income tax.
• Investment Risks: Investing HSA funds carries the risk of potential losses, depending on market conditions.
• Not Suitable for Everyone: HSAs may not be the best fit for those with low healthcare costs or who cannot meet the HDHP deductible.

FAQ

Who is eligible for an HSA?

Individuals covered by a qualified high-deductible health plan (HDHP) can open and contribute to an HSA, although certain conditions may apply.

How do I contribute to my HSA?

Contributions can take place through payroll deductions, direct deposits, or personal contributions, but must remain within annual IRS limits.

What expenses can be paid with HSA funds?

HSA funds may be utilized for a wide range of qualified medical expenses, including deductibles, co-payments, prescriptions, and preventive care services.