A health savings account (HSA) is a tax-advantaged medical savings account for U.S. taxpayers who are enrolled in high-deductible health plans (HDHPs). Employers may make contributions to their employees’ HSAs, and the funds that an individual or business contributes to a given account aren’t subject to federal income tax. Also, funds that aren’t spent roll over and accumulate year-to-year.
People may use funds from their HSAs to purchase eligible medical expenses (prescription costs, deductibles, copayments, and coinsurance) without paying taxes on those purchases, according to Section 213(d) of the Internal Revenue Service Tax Code. If an individual wants to use HSA funds for over-the-counter medications, he or she will need to obtain a doctor’s prescription for the item(s).
Looking to the IRS, medical expenses include:
“Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.”
For less-common expenses, speak with your tax advisor.
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Both HSAs and FSAs are intended to help people set aside money for future medical expenses. Unlike an FSA, funds in HSA accounts roll over year-to-year if they’re not used by the enrollee. Here are some of the most noteworthy differences:
|HSA: Employees must have high-deductible health insurance plans (HDHPs). According to the IRS, for self-only coverage, the minimum annual deductible is $1,300 – and the maximum annual deductible and other out-of-pocket expenses total $6,550. For family coverage, the minimum annual deductible is $2,600 – with a maximum of $13,100.|
|FSA: Eligibility is up to the employer, assuming the employee isn’t enrolled in an HSA. Employees may also qualify for a limited purpose FSA (LPFSA) for dental, vision, and certain other expenses.|
|HSA: The HSA contribution limit for individuals is $3,350 – with the family coverage limit at $6,700.|
|FSA: Although employers may set a lower limit, the FSA contribution limit is $2,550.|
|HSA: HSA accounts aren’t linked to specific employers. Accounts are set up through banks and are then controlled by each corresponding employee.|
|FSA: Employers set up and own FSA accounts. Unlike HSAs, employees can’t take FSAs with them when they leave companies.|
|HSA: Enrollees can change their contribution amounts (up to the IRS limits) at any point throughout the year – on a monthly basis.|
|FSA: Enrollees can only change their contribution amounts during open enrollment, or if they undergo a qualifying life event (birth of a child, marriage, etc.).|
For a more detailed explanation of the differences between HSAs and FSAs, check out our blog post: FSA vs HSA: Which is Best For Your Employees?
According to the IRS, you can claim tax deductions for contributions that you (or anyone other than your employer) make. This is true even for contributions that you don’t itemize on Schedule A (Form 1040). Any contributions made by your employer to your HSA should be excluded from your gross income.
All contributions remain in your account until you use them, and interest/earnings on assets in the account are also tax-free.
One of the benefits of using an HSA is that it’s portable for the account holder. That means that wherever an employee moves to, she or he will still be able to access and use funds from the account. Also, funds roll over year-to-year, so the account holder will be able to access funds for medical expenses down the road.
There are countless options when it comes to selecting employee health benefits. Factors such as age, health history, and expected life changes should factor into a person’s decision process. With this in mind, choosing the “best” health insurance option will be a different process for each employee. Offering a selection of quality health benefits options to employees is the best approach to ensuring their health and happiness.