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 HSA funds withdrawn for qualified medical expenses escape federal taxation entirely.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 HSA’s or offer HSA’s 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
Health Savings Accounts (HSAs) were created by Public Law 108-173, the “Medicare Prescription Drug, Improvement and Modernization Act of 2003,” signed into law by President Bush on December 8, 2003. Health Savings Accounts will change the way millions meet their health care needs because they are designed to help individuals save for qualified medical and retiree health expenses on a tax-advantaged basis. Any adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA. Tax-advantaged contributions can be made in three ways: • the individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions; • the individual’s employer can make contributions that are not taxed to either the employer or the employee; and, • employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction. To encourage saving for health expenses after retirement, individuals
