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March 25, 2020

What is an Health Savings Account (HSA)?

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Health Savungs Account

A tax-exempt account that is used to pay or reimburse certain medical expenses incurred by covered individuals.

Definition

Health Savings Accounts (HSAs), created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, are individual savings accounts, for which the amounts are intended to be used to pay for medical expenses on a tax-free basis.

HSAs are used in conjunction with a high deductible health plan (HDHP).

The following individuals are eligible for HSAs:

  • Any individual that is covered by an HDHP
  • Any individual that is not covered by other health insurance
  • Any individual that is not enrolled in Medicare
  • Any individual that can’t be claimed as a dependent on someone else’s tax return

HSA Limits

2021 Limits

Up to $3,600 for those with self-only HDHP coverage,

Up to $7,200 for those with family HDHP coverage.

Referring Cite

IRC § 223, IRS Publication 969

Additional Helpful Information

  • HSA contribution and catch-up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual
  • A fiscal year plan that satisfies the requirements for an HDHP on the first day of the first month of its fiscal year may apply that deductible for the entire fiscal year
  • There is no compensation caps on eligible requirements for contributing to an HSA
  • Individuals need not have earned income in order to contribute to an HSA
  • Children cannot establish their own HSAs
  • Spouses can establish their own HSAs, if eligible
  • Funds remain in the account from year to year, just like an IRA.
  • There are no “use it or lose it” rules for HSAs
  • Contributions to an HSA must discontinue once an individual is enrolled in any type of Medicare
  • If HSA distributions are not used for qualified medical expenses, the amount distributed is included in income and subject to the 10% additional tax. The additional tax does not apply if the distribution occurs after (a) the individual dies or becomes disabled or (b) the individual reaches age 65

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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