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Health Savings Account Benefits & Features

Health savings accounts are individually owned accounts that are used to reimburse your out-of-pocket costs for eligible medical expenses. A bank, insurance company or other approved entity, known as a trustee, collects deposits to the HSA and holds the funds for distribution.

  1. HSA Qualifying

    • To qualify for an HSA, you must have high-deductible health insurance or no insurance at all. The amount of deductible required to make a health insurance policy a high-deductible policy can change from year to year. Always verify the deductible requirements to maintain your qualifying status for the HSA. You cannot establish an HSA if you are enrolled in Medicare, or someone else claims you as a dependent on his federal tax return. There are no income limits on who may establish an HSA, and you do not have to have earned income. Retirement or other passive income can be used to establish an HSA.

    HSA Account Funds

    • One of the big benefits of an HSA is that you own and manage the account. You can decide how much to contribute to the account up to the established annual limits for that year, which medical expenses to reimburse yourself for and how the money held in the account is invested. Because you own the account funds, you do not "lose" unused funds at year-end as you do with a flexible spending arrangement.

    Contributions to the HSA

    • You can make contributions directly to your HSA up to the annual limit. If your employer offers the HSA and has a cafeteria plan, your contributions to the HSA are made as pre-tax deductions from your payroll checks. If your employer elects to contribute to your HSA, those contributions are not taxable income to you.

    Withdrawals From the HSA

    • Because you own the HSA account, you withdraw money from the account when needed to pay your out-of-pocket expenses. All money withdrawn from the HSA should be for qualified medical expenses only. Qualified medical expenses are defined by Internal Revenue Service regulations. With certain exceptions, expenses qualified for an HSA withdrawal are the same as those allowed as medical expense itemized deductions. One notable exception is that over-the-counter drugs are qualified expenses for an HSA withdrawal. Another exception is that privately paid insurance premiums are not qualified expenses except for COBRA, certain Medicare premiums and long-term care.

    Record Keeping

    • You do not need to prove expenses to withdraw funds from the HSA account, however, you should carefully maintain medical receipts for all withdrawals in case of an IRS audit. If withdrawals from an HSA are deemed unqualified, the funds are taxed at your normal tax rate, and you will incur an additional 10 percent penalty for the withdrawal.

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