An HSA is a tax-advantaged account created for or by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year. The contributions can also be used for other qualified medical expenses, including preventive care and prescription drugs.
KEY TAKEAWAYS
An HSA is a tax-advantaged account to help people save for medical expenses and reduce their tax burden. Contributions to an HSA are not taxed, but earnings in the account grow tax-free and distributions can be used to pay for qualified medical expenses. An HSA owned by an employee can be funded by the employee and employer or by their spouse if the person has attained age 65 by the end of the calendar year in which their original contribution is made.
Advantage
The HSA is a tax-free savings account intended to help employees save for their future health care expenses. Contributions made to an HSA are 100% deductible for the employee and 50% deductible for the employer. In addition, earnings in the account are exempt from taxes, and excess funds can be used tax free to pay medical expenses. Distributions from an HSA are also tax free, provided that they are used for qualified medical expenses as outlined by the IRS.
DisAdvantage
The most obvious drawback to an HSA is that you must be a good candidate for an HDHP. In addition, you must have a high-deductible plan, lower insurance premiums, or be affluent enough to afford the high deductibles and benefit from the tax advantages.
HSA Contribution Rules
HSAs are flexible, portable, and tax-preferred savings vehicles for private employees and their families. Contributions made to an HSA do not have to be used or withdrawn during the tax year. Instead, they are vested, and any unused contributions can be rolled over to the following year. Also, an HSA is portable, meaning that if employees change jobs, they can still keep their HSAs.
Can I pay my insurance premiums with my HSA funds?
You cannot use HSA funds to pay for your monthly premiums. Most individuals will continue to pay premiums via credit card or monthly check for health insurance coverage through their employer, Medicare and Medicaid. However, you do have the option of paying your health benefits directly from your HSA account when it is not necessary to use those funds for other purposes.
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Money in your HSA can earn interest
As a Health Savings Account (HSA) owner, you have several options for using your HSA. One of the most common ways is to invest the money into mutual funds or stocks. This enables you to build up tax-free interest income while preserving its growth in your account. You may also be able to use this money to pay for long-term care insurance if you need assistance with ongoing medical costs after retirement.
