What is a Health Savings Account (HSA) and how does it work?

These are tax deferred savings accounts that are set up in conjunction with a high deductible health insurance plan to allow individuals to save for qualified medical expenses on a tax-free basis. An HSA account can be established by an individual or family who is eligible. Your contributions are deductible and the distributions are not taxed if used for medical costs. If contributions are made by an employer, they are excludible from income. Unused amounts remain in the account from year to year to be used as needed.

These accounts are usually setup through a financial institution, such as a bank or insurance company. To qualify for an HSA you must meet the following requirements: 

  • Must be covered under an HDHP (high deductible health plan) 
  • May not be covered under any other non-HDHP plan 
  • May not be entitled to Medicare benefits (although you may draw out of a previous HSA) 
  • Cannot be claimed as a dependent by another taxpayer
 
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