An HSA (Health Savings Account) is a tax-advantaged account that eligible individuals can use to pay for (or reimburse themselves for) qualifying medical expenses. In most arrangements, money is deducted from an employee’s paycheck pre-tax to be deposited into the HSA account. There is no tax paid on those earnings as long as the money in the HSA account is used qualifying medical expenses. Unlike other types of tax-advantaged accounts like health reimbursement arrangements (HRAs) and health flexible spending accounts (FSAs), HSAs must be paired with high-deductible health plans (HDHPs). Also different from HRAs and health FSAs, the employee is the owner of the HSA, not the employer.
To be eligible to contribute to an HSA, an individual must be covered by a qualifying HDHP. For clients participating in the Helpside Employee Medical Plan, we offer two options that are HSA qualifying HDHPs. In addition, the individual cannot be covered by any other health coverage (with some narrow exceptions), enrolled in Medicare or claimed as a dependent on another person’s tax return.
Both employers and employees are able to make HSA contributions; this is in contrast to an HRA where only employers can make contributions. An individual who contributes to his or her own HSA (outsuide their paycheck deductions) may take an above-the-line deduction for the contributions on their individual tax return. Employers can also take a tax deduction for HSA contributions.
HSAs are subject to maximum annual contribution amounts. The amounts vary depending on whether the individual has self-only or family HDHP coverage, and they are indexed annually by the IRS. Employees who receive employer contributions to their HSA must take this contribution amount into account when determining their own contribution, so as to not go over the IRS limit.
Individuals may use their HSAs to pay for (or reimburse themselves for) the qualified medical expenses of themselves, as well as their spouses’ and dependents’ qualifying medical expenses. Qualifying medical expenses are unreimbursed medical care expenses (as defined under Section 213(d) of the Internal Revenue Code) that are incurred after the HSA is established.
HSAs are different from HRAs and health FSAs because they can be used to pay for non-medical expenses. However, if HSA funds are used for purposes other than qualifying medical expenses, the amount used for those expenses is included in the owner’s income and is generally subject to an additional tax of 20 percent.
Also, as part of the health care reform law, over-the-counter medicine expenses (except insulin) cannot be reimbursed from an HSA unless they are prescribed. At the end of the year, unused HSA funds roll over to the next year, which is not true for health FSAs. HSAs are portable, meaning employees can maintain their HSA account and funds when they leave their jobs, and they do not forfeit any amounts upon retirement or termination of employment.