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.
The concept of Health Savings Accounts combines an affordable qualified High Deductible Health Plan (HDHP) and a tax-favored health savings account (HSA). The combination results in savings through lower health care premiums and a reduction in taxable income. The HSA grows tax-deferred, and if you use your HSA funds for eligible medical expenses, you never have to pay taxes on those funds!
With an HSA, you control your health care decisions!
Over the life of your Health Savings Account, you could save thousands of dollars in taxes.
Example: If you had a deductible of $3,000, contributed your maximum amount ($3,000) each year, estimate you will use $500 each year on medical expenses, fell in the 28% tax bracket, have a state sales tax of 5%, you were 40 years old, planned to contribute to your HSA until you were 65 years old and anticipated a three percent average interest rate, you could expect a tax savings of $9,453.89.
Federally qualified Health Savings Accounts are tax-deductible, tax-deferred and tax-free:
Tax-deductible – Contributions to your HSA are able to be deducted from your gross income.
Tax-deferred – HSA funds grow without being subject to taxes until they are used for non-eligible medical expenses.
Tax-free – The funds in an HSA are completely tax-free when used for eligible medical expenses.
Federal vs. State Tax Benefits
Qualified High Deductible Health Plan IRS Requirements
IRS Contribution Limits
Eligible Medical Expenses
Eligible medical expenses are defined as those expenses paid for care as described in the Internal Revenue Code (Quick Reference List). Non-prescription medicines (other than insulin) purchased in tax years beginning after December 31, 2010, are not considered qualified medical expenses. An over-the-counter medicine or drug can be a qualified medical expense if you get a prescription for it.
HSA Bank™ has created the following lists to help you determine whether an expense is eligible or not. The lists are provided with the understanding that HSA Bank is not engaged in rendering tax advice. These lists are to serve as a quick reference. For more detailed information, please refer to IRS Publication 969 and IRS Publication 502 or contact a tax professional.
Health Insurance may not be purchased with HSA Funds. There are 3 situations which are exceptions whereby HSA funds can be used to pay for:
1) A health plan during any period of continuation
coverage required under any Federal law.
Select this link to see a comparison between the HSA, HRA and FSA: HSA, HRA and FSA Comparison
Select the link for more detailed information about the HSA: U.S. Treasury
¹ Revenue Ruling 2003-102, 2003-38 I.R.B. 559
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