What is a Health Savings Account?

Answer:
Health Savings Accounts (HSAs) are a type of

account created by legislation passed in 2003 that are designed as a vehicle for setting aside money on a tax-free basis to save for qualified medical expenses and retiree health expenses.

Not everyone is qualified to open an HSA. For example, you cannot be covered by other health plans, High Deductible Health Plans (HDHPs), or be enrolled in Medicare. In addition, you can’t open an HSA if you are claimed as a dependent on someone else’s tax return.

The advantage of using a Health Savings Account is that your contributions are not taxed and distributions are tax free for qualified medical expenses. However, money taken from the Health Spending Account for non-qualified medical expenses is considered income and will be taxed as such. In addition, a ten percent penalty is applied unless the individual dies or becomes disabled or is age 65 or above.

Another advantage to HSAs is that there isn’t a “use it or lose it” rule as there is with Flexible Spending Arrangements. In addition, the funds held in the account can grow through investment earnings in much the same way as IRAs do.


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