A health savings account (HSA) is a tax-favored medical savings account available to taxpayers. HSAs enable taxpayers to pay for current medical expenses and save for future qualified medical expenses on a tax-free basis.

An HSA is created by enrolling in an high-deductible health plan (HDHP), and establishing the HSA with a qualified trustee (bank, insurance company, or IRS approved).

Generally, taxpayers will pay medical expenses during the year without being reimbursed by the HDHP until the plan’s annual deductible is reached. When the taxpayer pays qualified medical expenses that are not reimbursed by the HDHP, the taxpayer can request a distribution from the HSA.

The benefits of HSA include:

  • HSAs enable taxpayers to pay for current medical expenses and save for future qualified medical expenses on a tax-free basis.
  • Amounts contributed to an HSA, except for employer contributions, can be used as an adjustment to income.
  • Taxpayers and employers can make contributions to the taxpayer’s HSA until the filing deadline.
  • Contributions to an HSA by an employer may be excluded from gross income.
  • The contributions remain in the account and are carried over, without limit, from year to year until the taxpayer uses them. There is no deadline by which qualifying expenses must be reimbursed by the HSA.
  • The interest and other earnings on the assets in the account are tax-free.
  • Distributions will be tax-free if used to pay un-reimbursed qualified medical expenses.
  • An HSA is portable, it stays with taxpayers even if they change employers or leave the work force.
  • Qualified medical expenses are those incurred by the following persons:
    • The taxpayer and spouse
    • All dependents claimed on the tax return
    • Any other person who could have been claimed as a dependent on the taxpayer’s return except that:
      • The person filed a joint return
      • The person had gross income of the exemption amount or more, or
      • The taxpayer or spouse (if filing jointly) could be claimed as a dependent on someone else tax return

A taxpayer must be an eligible individual to qualify for an HSA:

  • Taxpayers must be covered by a high-deductible health plan (HDHP) to take advantage of HSA. An HDHP generally costs less than traditional health care coverage. These cost savings can then be put into the HAS.
  • Not be covered by other health insurance plan
  • Not be enrolled in Medicare
  • Not be eligible to be claimed as a dependent on someone else’s tax return

The amount the taxpayer or any other person can contribute to the taxpayer’s HSA depends on the type of HDHP coverage, the taxpayer’s age, the date the taxpayer became an eligible individual, and the date the taxpayer is no longer an eligible individual. In addition, the contribution limit for an HSA is reduced by employer contributions.

I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.

Please do not hesitate to contact me should you have any question