What is an HSA?
Health savings accounts (HSA) are tax-free savings accounts connected to high-deductible health plans (HDHP). HSAs are used to cover healthcare-related expenses not covered by an HDHP.
How an HSA Works
Individuals with HDHP pay small annual premiums for health coverage with a sizable deductible (generally $1,500 or more). As a result, this type of plan allows holders to maintain and contribute to an HSA individually or as part of a group plan administered by an employer.
HSA contributions are tax deductible and also accrue interest free of tax. Withdrawals are tax-free provided that the money is used for health-related expenses, and the balance of the account rolls over from one year to the next. Once the account holder reaches retirement age, he/she is eligible for distributions from the HSA similar to those that are made from a traditional IRA.
Why an HSA Matters
HSAs are important because they are used to save money for future medical expenses. The money a person deposits into their HSA is theirs to withdraw at any time to cover medical expenses that are not paid by their HDHP or reimbursed by anyone else.
It is also important not to confuse an HSA with a health reimbursement account (HRA), which is a savings account funded and managed by an employer for reimbursing employees for expenses not covered by a group plan. HSA holders are allowed to contribute only a certain amount each year, and any withdrawals used for purchases other than health expenses are taxed as regular income.
HSA vs. FSA
FSA (Flexible Spending Account) and HSA plans are similar in that they both resemble personal savings accounts and can only be used for qualifying medical expenses. However, HSA plans are only available to people with high-deductible health plans (HDHP).
In addition, the HSA balance of the account rolls over from one year to the next, while FSA funds typically have to be used before the end of the year, unless the employer has selected a rollover option.