Health-Savings Accounts (HSA)

Lesson

Health Savings Accounts (HSAs) are tax-advantaged accounts that help individuals save for qualified medical expenses. These accounts are available to those enrolled in a high-deductible health plan (HDHP). Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Practice Question #1

Which of the following is a requirement for opening a Health Savings Account (HSA)

Terms

Health Savings Account (HSA):

A tax-advantaged account used to save for qualified medical expenses.

High-Deductible Health Plan (HDHP):

A health insurance plan with a higher deductible than traditional plans, often paired with an HSA.

Qualified Medical Expenses:

Expenses for medical care can be paid using HSA funds without incurring taxes or penalties.

Triple Tax Exempt:

Contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-exempt.

Practice Question #2

Which of the following expenses can be paid for using HSA funds without incurring taxes or penalties?

Do Not Confuse With

Flexible Spending Account (FSA):

A tax-advantaged account for medical expenses, but with a use-it-or-lose-it provision and no investment options.

Practice Question #3

How do Health Savings Accounts (HSAs) differ from Flexible Spending Accounts (FSAs)?

Historical Example

In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act was signed into law, which introduced Health Savings Accounts to help individuals save for medical expenses and control healthcare costs.

Real-World Example

Jane has a high-deductible health plan and has decided to open an HSA to save for future medical expenses. She contributes $7,300 (2023 family coverage limit) to her HSA and uses the funds to invest in a diversified portfolio of stocks and bonds. When Jane needs to pay for a qualified medical expense, she can withdraw the funds tax-free from her HSA.

Thresholds to Remember

- Annual contribution limits: The maximum amount an individual or family can contribute to an HSA each year. - Catch-up contributions: Additional contributions allowed for individuals aged 55 or older. - High-deductible health plan (HDHP) requirements: The minimum deductible and maximum out-of-pocket expenses for a health plan to qualify as an HDHP.

Threshold Examples

- Annual contribution limits: For 2022, the annual contribution limit for an individual is $3,850, and for a family, it is $7,750. - Catch-up contributions: Individuals aged 55 or older can contribute an additional $1,000 per year to their HSA.

Pitfalls to Remember

- Excess contributions:

Contributing more than the annual limit to an HSA can result in a 6% excise tax on the excess amount.