Health Savings Accounts

Posted by BAS - 30 January, 2014

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A health savings account is an IRA-like, tax-exempt trust or custodial account that can be used to pay for certain medical expenses of the HSA holder, the holder’s spouse and/or tax dependents. An HSA is available to an individual who is covered by a certain type of high-deductible health plan. Contributions to an HSA are tax-free.

To be eligible to contribute to an HSA, the individual must

  • Be covered under a qualifying high deductible health plan with self-only or family coverage. The individual may not have any other health coverage.
  • Not be entitled to Medicare.
  • Not be claimed as a tax dependent by any other taxpayer.

An HSA is an individual account. The HSA is created through a banking institution. Sometimes the HSA is created directly by the employee, and other times the employer facilitates the implementation of the HSA.

Contributions to an HSA may be made in cash and can be made by anyone on behalf of the eligible individual. Contributions are limited each year. For 2014, the contribution is $3,300 for an individual who has self-only coverage and $6,550 for an individual with family coverage. HSA holders age 55 and older may contribute an extra $1,000. Contributions are deductible from gross income.

Withdrawals from an HSA to pay qualified medical expenses are tax-free. A qualified medical expense is an expense for medical care as described in Section 213(d) of the Internal Revenue Code. To be a qualified medical expense, the expense must be incurred to diagnose, cure, mitigate, treat or prevent disease, or to affect any structure or function of the body.

HSA holders may withdraw amounts for non-medical expenses, but those amounts will be subject to tax and a 20% penalty. There is no penalty assessed on a non-medical expense withdrawal if the account holder is 65 or older, but the tax is still imposed.

HSA money is not forfeited. It is owned by the account holder and continues to grow tax deferred. It is a portable account. An HSA may accumulate interest earnings. Earnings accumulate tax-free and remain tax free if used to pay qualified medical expenses.

HSA participation is becoming more popular in coordination with high deductible health plans.

Topics: HR & Benefits Compliance


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