Consumer-Directed Health Plans 101:
2. Health Savings Accounts (HSAs)
An HSA is a true bank account into which you deposit money to be used for your future healthcare expenses. Your HSA contributions can be deducted from your paycheck before taxes, or you can contribute your own money and deduct your contributions when you file your income taxes. Your employer or family members can also contribute to your HSA. No matter who contributes, the money is yours and will stay with you even if you change jobs or retire. The money in your HSA earns interest just like a regular bank account.
You’ll need a qualifying “high-deductible health plan”—also known as an HDHP—to go with your HSA. HDHPs must have a deductible of $1,150 or more, but sometimes preventive care is exempt from that deductible. The great thing about HSAs is that you can use the money in your account to pay those deductible expenses. Any unused money in your HSA carries over from year to year just like a regular savings account, so you can save your money for future medical expenses.
HSAs are available from most banks, credit unions, and other financial institutions. They come with checkbooks and debit cards you can use to access your account funds. Your bank won’t check to make sure you only use HSA funds for eligible healthcare expenses. You’re responsible for keeping those receipts or other documentation to prove that you used your HSA appropriately in case of an IRS audit.
For more detail on HSA regulations, visit the U.S. Treasury’s HSA FAQ site.
- Your, your employer, or your family members can contribute to your HSA.
- You own your account and all the money in it, no matter who contributed.
- Money you or your employer deposit is tax deductible, earns tax-free interest, and can build from year to year.
- You can withdraw funds to pay for medical expenses any time without taxes or penalties.
- You can withdraw funds for nonmedical use subject to taxes and an IRS penalty.
- HSAs are regulated by the federal government.
- You must have a qualifying high-deductible health plan (HDHP) to contribute to your HSA. If your HDHP coverage ends, the HSA is still yours. You can spend those funds on qualifying healthcare expenses, but can’t make additional contributions without an HDHP.
Next, we’ll cover HRAs.
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