What are Health Savings Accounts (HSAs)? Health savings accounts are tax-favored accounts that can be contributed to by or on behalf of “eligible individuals” covered by certain high deductible health plans (HDHPs) to pay for certain medical expenses of eligible individuals and their spouses and/or tax dependents. An individual with a high deductible health plan (HDHP) can make contributions up to certain limits and get an “above the line” taxed deduction. This means that contributions reduce the individual’s gross income before itemized or standard deductions are considered. Investment earnings on HSA funds are generally tax-free. HSA funds withdrawn for qualified medical expenses escape federal taxation entirely. Employers that contribute to HSAs or offer HSAs under a cafeteria plan get a federal tax deduction for those contributions. Employer contributions are treated as employer business expenses and are not includable in an employee’s gross wages. These contributions are not subject to the normal payroll taxes such as FICA or FUTA. Who qualifies for an HSA? An individual must be covered under a qualifying high deductible health plan to be eligible to contribute to an HSA. An individual may not be enrolled in Medicare and cannot be claimed as a tax dependent by another taxpayer. How does one establish an HSA? The first step in establishing an HSA is to find a qualified trustee or custodian and complete an HSA trust or custodian agreement/application. An HSA trustee or custodian must be an insurance company, a bank or other entity approved by the IRS. If there is a balance in the HSA account at the time of an account holder’s death, that balance will be passed to his or her designated beneficiary. Therefore, a beneficiary designation form must be signed at the time the account is established. Once an HSA has been established, the amount of the contribution should be determined. This is an indexed amount that will change from year to year. For the most current information please refer to the list below or visit IRS.gov publication 15-B for more information. Historical HSA Contribution Limits 2018 – $3,450 / $6,900 – $1,000 catch-up 2019 – $3,500 / $7,000 – $1,000 catch-up 2020 – $3,550 / $7,100 – $1,000 catch-up HSA participants will also have to decide where they would like to deposit their contributions. Subject to certain restrictions these funds may be invested in different investment types such as bank accounts, certificates of deposits and mutual funds. Individuals participating in an HSA account should be careful not to pledge any portion of the HSA as security for a loan. If any amount of the HSA is pledged as security for a loan, the amount of the pledge is treated as a taxable distribution. The 10% excise tax applicable to distributions not used for qualified medical expenses will also apply. HSA account holders are also responsible for determining whether HSA distributions are used for qualified medical expenses and should maintain appropriate records to establish their eligibility as a qualified medical expense.