What is a Health Savings Account?
Health savings accounts, or HSAs, have been growing in popularity over the past few years. You may be considering offering this as part of your benefit package for your employees and wondering what makes an HSA. Here are some key points to know about this benefit.
- HSAs are savings accounts.
HSAs are savings accounts designed to allow account holders to set funds aside to be used towards qualified medical expenses. The funds stay in the account year after year and are available for expenses which may occur in the future. Often, funds can be invested after a certain balance is reached in the account. The account holder can save on taxes if they are able to contribute through pre-tax payroll deductions. If pre-tax payroll deductions are not available, the account holder saves when filing their taxes by taking an above the line deduction.
- HSAs are individual accounts.
Even though an employer may be sponsoring HSAs as part of their benefit package, if an employee establishes an account it is in their name. The account stays with the individual even if they change jobs.
- HSAs have specific criteria that must be met in order for an individual to be eligible to contribute to the account.
Individuals establishing an HSA must be eligible based on several factors. They must be covered by a qualified high deductible health plan (HDHP) for their health insurance. They may not be covered by another plan such as a regular flexible spending account or a spouse’s insurance that is not a qualified HDHP. Additionally, an individual may not be claimed as someone’s dependent for tax purposes.
- The individual is responsible for only using the funds for eligible expenses.
There is no claim adjudication for HSAs. The account holder is responsible for only using the funds for eligible expenses as allowed by the IRS. If the funds are used for an expense that is not eligible, the account holder must report the expense when filing their taxes and pay the associated taxes and penalties. Since receipts are not required to be submitted for approval when the account is used, it is up to the individual to save all of their documentation and know the rules of the plan.
- Contributions can be made to an HSA by the account holder, their family members or the employer.
The account holder is not the only person who can contribute to their HSA. A family member or employer can make contributions to the account.
- There is an annual maximum contribution amount for HSAs.
The IRS establishes the annual contribution amount for HSAs. Depending on single or family coverage level, an account holder may not contribute more than the amount allowed for the tax year. There is a penalty for contributing too much unless the excess funds are removed from the account before the account holder files their taxes for the year.
While there are many important details to know about HSAs and how they work, understanding the key points of this benefit is a good place to start.
BusinessPlans, Inc. – myCafeteriaPlan does not intend to provide legal or tax advice and information contained in this article should not be interpreted as such. Regulations governing pretax plans are often open to interpretation and should be reviewed with your legal or tax advisor before making any decisions regarding your plan.