A HSA (Health Savings Account) is a personal bank account that allows you to save money and pay for health care services and qualified medical expenses. You have to sign up for a health plan that meets or exceeds a deductible set by the IRS. There are other IRS guidelines to be eligible too. With an HSA, you are contributing money, so you own it. Your employer along with family and others can choose to put money in it also.
You add money to your HSA with deposits like other personal bank accounts, however, your employer may allow you to deposit money straight from your paycheck pre-taxed. You don’t have to pay federal, or in most cases, state income taxes on money deposited into an HSA, money spent from an HSA or interest earned from an HSA. If you put money into an HSA using the pre-tax payroll deposit via your employer, you don’t have to pay Social Security taxes on it either. You can earn interest on any money not spent, but that will be dependent on the type of bank account you use and how much is remaining in the account.
There is a limit to the amount and this amount can be found in your health plan documents. And while there are annual limits for how much can be contributed, there is no limit to how much you save long term. Yes, since you own the account and contribute, the money stays until you choose to spend it. Even if you change employers the account goes with you. You can save and use it into your retirement. On the other hand, if you decide to cash it out and don’t spend it on qualifying medical expenses you will be subject to paying income taxes on it. This could include a tax penalty.
Qualified Medical Expense: a health care service, treatment or item that the IRS says can be purchased without having to pay taxes.
Eligible Medical Expense: a health care service, treatment or item that the IRS says can be covered or reimbursed (paid back) by a benefit plan.
Next week: What is a FSA?