Health Saving Account is created for people covered with HDHP [High-deductible Health Plans], which does not cover their medical expenses. With HSA, they can save for potential medical expenses. Specific contributions are added to the policy-holders account by their employers or themselves, every year. Over time these invested contributions can be used in paying for specific medical care like vision, dental and OTC medicines.

How HSA works?

A deductible is a part of an insurance claim, which the insurer pays from his/her pocket. HDHP has high deductibles than regular health plans.

In 2019 for individuals, the minimum deductible is $1,350 and the maximum is $6,750. For families, the minimum and maximum are $2,700 and $13,500, respectively. After the insurer pays their portion of a claim, the insurance provider will cover the remaining portion, as per the contract. You can check the HSA calculator to get an idea of how much you need to contribute for the current tax year.

HSA eligibility

If a person holds HDHP they get qualified for an HSA. Health Saving Account is normally paired with qualified HDHP offered by the insurance provider. Financial institutions also open an HSA. For this, the taxpayer has to meet the standards set by the IRS or Internal Revenue Service. The qualified HDHP holder gets no health coverage and is not enrolled under Medicare. He/she does not depend on the taxes of other people.

Contribution to a Health Saving Account is cash-only funded by employer or employee. Even family members can contribute to the HSA of an eligible individual. Self-employed or unemployed can contribute to HSA, but they need to fulfill the requirements.

Tax savings

Besides saving for health care, HSA offers tax benefits

  • No tax has to be paid on the amount contributed to your HSA.
  • No tax on money withdrawal from HSA for paying qualified medical care charges. Remember if you use HSA funds for non-qualified expenses, then you will get penalized and subject to income tax.
  • Tax-free interest money can be earned from your HSA. You can even invest the funds in your HSA if you wish.
  • No money is lost from your HSA if not used but balance is rolled over to the following year. You can thus save, invest or spend.
  • When you reach the age of senior citizenship, then the HSA funds can be used for any purpose. There will be no penalty and the money withdrawn to pay for qualified medical care charges tax-free. However, the income tax penalty applies to non-medical use.
  • HSA can be transferred to surviving spouse tax-free on the account holder’s death.

HSA versus Flexible Savings Account [FSA]

Both the accounts can be employed to pay for medical expenses but there are a few differences between them.

  • FSA gets forfeited at the end of the tax year but HSA funds get carried forward in the following tax year.
  • The employee or employer can change the contribution amount anytime for the HSA plan but the FSA amount is fixed and can be changed at the start of the next tax year.

Therefore never compare Health Savings Account with Flexible Savings Account. Don’t confuse HSA with Health Spending Accounts. The latter is used by employers to offer dental and health benefits to their local employees.