What is a health savings account (HSA)?

Health savings account (HSA) overview

A health savings account or HSA is a tax-advantaged savings account owned by an individual that can be used to pay for qualified medical expenses for the owner and their dependents. An HSA, which must be paired with an HSA-qualified health plan, allows you and your employees to make pre-tax contributions to a federally-insured account that can be used to pay for qualified medical expenses. HSA-qualified health plans typically cost less than traditional plans and the money saved can be deposited into an HSA for immediate use or long-term savings. HSA balances earn tax-free interest, roll over from year to year and can be invested to accelerate growth. At age 65, HSA funds can be withdrawn for any reason and are taxed as income, just like an IRA or 401(K). Tax-free distributions are still available for qualified medical expenses.

HSAs are owned by individuals and never expire

All of the money in an HSA (including any contributions deposited by an employer) is owned by the employee even if they leave their job, lose their qualifying coverage or retire. The money in an HSA never expires. Unlike flexible spending accounts (FSAs), all remaining HSA funds roll over each year.

HSAs earn tax-free interest and investment income

HSAs earn interest just like a traditional savings account. But unlike a traditional savings account, interest earned on an HSA is not taxed. Once an account meets a certain balance threshold, funds can be invested in mutual funds to maximize HSA earning potential.

HSAs are great for retirement savings

Because interest and investment income earned on an HSA is not taxed, HSAs are great retirement savings accounts. After age 65 employees can spend HSA money on non-medical items without paying a penalty. Non-medical withdrawals after age 65 are taxed as income just like withdrawals from a 401(K) or IRA.

Qualified medical expenses (QMEs)

  • Acupuncture
  • Birth control
  • Chiropractor
  • Contact lenses
  • Dental treatment
  • Prescription eyeglasses
  • Fertility enhancement
  • Hearing aids
  • Lab work
  • Medical supplies
  • Physical exams
  • Prescriptions
  • Orthodontia
  • Radiology
  • Stop-smoking programs
  • Surgery (non-cosmetic)
  • Therapy

To see more qualified expenses, visit HealthEquity.com/qme.

Tax advantages for employers and employees

Tax advantages for employers

Employer contributions are deductible by the employer as contributions to a health plan. Amounts employers contribute to their employees’ HSAs are not generally subject to employment taxes. Employers must report the contributions on box 12 on Form W-2 for each employee, including amounts the employee contributed through a cafeteria plan.

Triple tax advantages for employees

HSAs come with a triple tax benefit:

  1. Reduces federal income taxes: When an employee contributes to an HSA directly from their paycheck, they reduce their federal income tax by the amount they deposit in their HSA. Contributions made by you or your employees through payroll deductions result in FICA and income tax savings. Employees are also able to contribute post-tax and claim that contribution when filing their taxes.
  2. Tax-free interest: Money in an HSA earns interest while it is in the account and the employee does not pay taxes on the interest earned. Any gains on dollars invested in mutual funds are also tax-free.
  3. Tax-free withdrawals: Employees never pay taxes on HSA withdrawals when used to pay for qualified medical expenses, including medical, dental, vision, and pharmacy expenses.

HSA must be paired with a qualified high-deductible health plan (HDHP)

To be eligible for an HSA, and employee must be covered by an HSA-qualified health plan and have no other health coverage, such as another health plan, Medicare, military benefits, or medical FSA’s. High deductible health plans or HDHPs typically have lower premiums than standard health plans. HSA-powered health plans usually cost much less than traditional plans and the money saved by both employers and employees can be contributed to an HSA.

Download our guide that explores what to look for in an HSA provider. Topics include HSA investments, employee education and more!

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