Health savings account

Health Savings Account (HSA) is a tax-advantaged financial instrument available to U.S. taxpayers who are enrolled in a high-deductible health plan (HDHP). An HSA allows individuals to set aside pre-tax income to pay for eligible healthcare expenses. This article provides a detailed overview of the structure, benefits, and potential drawbacks of HSAs.

Overview

HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, with the aim of providing a means for individuals with high-deductible health plans to save for medical expenses.

Key Features of Health Savings Accounts

HSAs offer several distinctive features that differentiate them from other healthcare financial tools:

Tax Advantages

Contributions to an HSA are tax-deductible, and the interest and earnings on HSA investments grow tax-free. Additionally, withdrawals for eligible medical expenses are not subject to federal income taxes.

Rollover and Accumulation

Unlike Flexible Spending Accounts (FSAs), HSAs do not operate under a "use-it-or-lose-it" policy. Unspent funds in an HSA roll over from year to year, allowing the account balance to grow over time.

Individual Ownership

HSAs are individually owned, which distinguishes them from employer-owned Health Reimbursement Arrangements (HRAs).

Contributions and Usage

Contributions to an HSA can come from the account owner, an employer, or both, but the total annual contributions are subject to federally mandated limits. Funds from an HSA can be used to cover a wide range of medical expenses defined by the IRS.

Potential Drawbacks

Despite the tax advantages and flexibility of HSAs, they may not be suitable for everyone. High-deductible health plans, which are a prerequisite for an HSA, may expose individuals to high out-of-pocket healthcare costs. Furthermore, the tax penalties for non-qualified withdrawals can be substantial.

Health savings account Resources
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