Health Savings Accounts (HSAs)

(Page 2 of 2 of Medical Expense Accounts: FSAs, HRAs, HSAs, and MSAs)

An HSA is a tax-exempt account that allows account holders to use employer contributions and earnings to pay future medical expenses.

An eligible individual may establish an HSA at any number of banks, credit unions, insurance companies, or other entities that meet IRS requirements. Or, the account may be established as part of an employee benefits program.

HSA Eligibility

To be eligible for an HSA, you:

  • must be covered by a qualified high deductible health plan (HDHP) -- a health insurance plan with lower premiums and higher deductibles than a traditional insurance plan
  • cannot be covered by any other insurance that would pay for medical expenses, except those that provide benefits only for accidents, dental care, vision care, disability, long-term care, worker's compensation, a specific disease or illness, or a fixed amount per day of hospitalization
  • must not be age 65 (the age when you become entitled to Medicare), and
  • cannot be claimed as a dependent by someone else.

You may or may not be eligible for an HSA if your employer offers a flexible spending account or a health reimbursement arrangement; it depends on the particular account the company offers.

HSA Tax Treatment

There are three ways to reduce your federal taxes with an HSA.

  • Make pre-tax contributions to your account, or deduct your post-tax contributions from taxable income on your Form 1040, whether or not you itemize deductions.
  • Enjoy tax-free earnings and growth on the money in your account.
  • Make tax-free withdrawals to pay for qualified medical expenses.

State tax treatment of HSAs varies according to your state's law.

HSA Contributions and Distributions

Contributions to an HSA can come from you, your employer (if the company offers such a benefit), or both.

For 2012, the maximum contribution, from all sources, for individual coverage is $3,100, and the maximum contribution for family coverage is $6,250. A catch-up provision of $1,000 also applies for participants who are between 55 and 65 years old. (You cannot continue to contribute to an HSA after you are eligible for Medicare.)  In 2013,  the maximum contribution for individual coverage will be $3,250, and the maximum contribution for family coverage is $6,450.

You can withdraw funds from your HSA, tax-free, to pay for any qualified medical expense not paid by your health plan. Qualified medical expenses are defined in IRS Publication 502, Medical and Dental Expenses.

If you use your HSA funds for anything other than qualified medical expenses, you will pay taxes on the withdrawal. If you are not disabled or older than 65, you also will be subject to a 20% penalty.

Unlike a flexible spending arrangement (discussed below), an HSA allows unused funds to roll over from year to year. There is no limit on how much you can accumulate in your HSA for future use. To learn more about HSAs, see Nolo's article Introduction to Health Savings Accounts (HSAs).

Tip You own your HSA. That means the account goes with you when you leave the company, even if it was established and funded as an employer-sponsored benefit.

Medical Savings Accounts (MSAs)

Like an HSA, an MSA is a tax-exempt account that allows account holders covered by a high-deductible health plan to save for future medical expenses. But the introduction of the more flexible HSA (described above) has made the MSA obsolete.

MSA Eligibility

The MSA, also known as the Archer MSA, was created specifically for self-employed individuals and small business employees.

MSA Tax Treatment

An MSA offers the same tax benefits as an HSA (see "HSA Tax Treatment," above).

MSA Contributions and Distributions

You can no longer open a new MSA and you cannot contribute additional money into an existing MSA. You can, however, continue to maintain an existing MSA and take tax-free distributions to pay for qualified medical expenses. If the account still has a balance when you retire, it will be converted to an individual retirement account (IRA).

Unless you are disabled, MSA distributions for anything other than qualified medical expenses prior to age 65 are subject to income taxes and a 15% penalty. Distributions made after age 65 for non-qualified expenses are subject to income taxes, but there is no penalty.

The account balance can roll over from year to year.

Tip An existing MSA can be left open or rolled over to an HSA. Californians may want to maintain their MSA -- unlike an HSA, the account enjoys the same tax treatment on the state level -- and open an HSA for future contributions.

There is much more to know about each of these accounts. To learn more about the particular type of account that is available to you or that you are considering establishing, check with your employer or see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. To order the publication, call 800-TAX-FORM or visit the IRS online, at

To learn about health insurance benefits granted you by law, see Nolo's article Getting the Most From Your Health Insurance.

To Learn More About HSAs

If you are an independent contractor, freelancer or consultant and want to know more about HSAs, see Working for Yourself, by Stephen Fishman (Nolo).

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