Health Savings Account (HSA)

The Health Savings Account is a tax-exempt trust or custodial account that may be owned by an individual, couple, family or corporation. It can be used to pay current and future medical expenses. Accounts can be set up as Archer Medical Savings Accounts (MSAs) which have certain rules for eligibility and contributions, or as Health care Flexible Spending Arrangements (HFSA), which have different rules for eligibility and contributions.

An HSA can only be spent on qualified medical expenses defined in IRS Code § 213(d) of the Internal Revenue Code. Qualified medical expenses are defined by the Internal Revenue Service as those used to diagnose, cure, mitigate, treat or prevent a disease or illness. They must also be for medical care as defined in § 213(d)(1) of the IRS Code.

Because it is an account-based system, HSA contributions can be made at any time during the year at any amount up to the maximum allowed by law each calendar year. The account holder has tax-deferred status until money from the HSA is withdrawn for qualified medical expenses. Once the funds are withdrawn, they are subject to regular federal income tax and state income taxes (if applicable). Funds can be used to pay for eligible medical expenses incurred by the account holder, a spouse or dependents. HSA funds can also be used to reimburse any qualified medical expenses specified by the account holder that are not covered by another health insurance policy. Any remaining funds in the HSA may be rolled over into another HSA, subject to IRS rules and regulations.

When leaving an employer who sponsors an HSA plan, money held in a participant's HSA belong to the individual (whether he is still working or has left employment). However, if the participant is leaving employment to enter the military, when he or she is discharged from active duty, employment with another employer who sponsors an HSA plan will not be considered to be active service for purposes of this exception.

If a participant dies and has an HSA while alive, his family can either choose to use his funds as directed in his will or they can take ownership of the account by having it transferred to their own names within 60 days of death. Once the account is transferred into the new owner's name, all future contributions are rollover contributions and not transfers. The new owner can set up another HSA. If an account balance is left in the name of a deceased participant, that balance will be rollover contributions for use to pay medical expenses of that individual's family members who qualify for an expense deduction.

The HSA can be used to pay for any type of medical care, including cosmetic surgery and mental health care. It can also be used to pay for expenses such as physical therapy, speech therapy, dentistry and acupuncture. The examples given are applicable only if the designated beneficiary is the account holder and not his or her spouse, or his or her dependents.

Eligibility rules for those eligible to establish an HSA include:

Although not required, the HSA can be established by the employer in lieu of a health insurance plan (provided that the employee has coverage under an employer-sponsored plan). If offered, a 10% contribution by the employee to his own HSA is permitted. Contributions can be made to an HSA by cash or check made payable either directly to the financial institution, or indirectly through payroll deductions (either through salary reduction or pre-tax payroll deduction). Contributions are deductible as provided for retirement savings plans such as 401(k), 403(b) and 457 plans. Contributions are also deductible as provided for health savings accounts specifically. Money in an account can be invested in mutual funds or stocks that the account holder wants to invest in. The account holder can also choose to have his money invested specifically in mutual funds approved for HSA purposes. Money contributed to the HSA is not taxed until it is withdrawn.

Any unused medical expense money at the end of any year is rolled over into a different HSA for future use. Rollover contributions are not subject to the same annual contribution maximum as regular contributions but they may be subject to income limits. Money in an HSA can also be rolled over into an Archer MSA, a Health Flexible Spending Account or other retirement plans such as 401(k) and 403(b) plans.

The HSA is completely separate from any insurance policy that may be held by the account holder. A person may have an HSA and also have another type of insurance policy. But only one can be used at a time to cover qualified medical expenses. If the account holder uses money in his HSA to pay for medical expenses that are covered by another health insurance policy, he may not deduct those expenses on his Schedule A (Itemized Deductions). He can only deduct the excess of his HSA deductible over the other insurance policy deductible.

As of 2016, if an account holder is married filing jointly, his or her spouse must be covered under the same plan (HSA or other insurance policy), but not both. If covered under the same plan, there is no limit on how much medical expenses are covered by either one combined. If one spouse is enrolled in an HSA and another spouse has a health insurance policy that does not cover medical expenses, then only one of them can be enrolled in an HSA at a time. If both spouses are enrolled under different plans, they cannot use the same HSA. One spouse must be covered by an HSA and the other spouse must have a policy that does not cover medical expenses.

As of 2016, there is no limit on the amount an individual can contribute to a Health Savings Account each year. The total contributions in any year can exceed the maximum annual deductible of $6,750.

Conclusion

HRAs and HSAs are both a type of tax exempt savings account that allow for tax deductible contributions and tax free distributions for medical care costs. The federal government has provided some advantages to both types of plans. The ACA did not affect the HSA at all – it is still a type of savings account with similar income limits as the HRAs. Both types of accounts allow certain health expenses to be paid with pre-tax dollars.

The major difference between them is that an HSA is completely owned by the individual, and they can contribute more money to their account than an employee can contribute to an HRA under many circumstances.