Health Savings Account

A Health Savings Account (HSA) is similar to a Flexible Spending Account (FSA) in that the money accumulated in the account is tax-free and the account can be used to reimburse qualified medical expenses. One of the differences is that with an HSA, the employer can also make contributions into the account in addition to the worker’s contributions. The best part is that those employer contributions are excluded from taxable income, and employment taxes do not apply.

The main difference between an HSA and an FSA is what happens to the funds that are not used up at the end of the calendar year. With an FSA, any money leftover is forfeited. With an HSA, any unused funds can be carried over year after year with the opportunity to be used for future qualified medical expenses. HSAs are also portable, allowing workers to keep the account in the event they change employment.

Another great feature is that for individuals between the ages of 55 and 65, the contribution limit is increased slightly so that they can “catch-up” on their contribution amount for the years an HSA wasn't’t offered. Once a person reaches age 65, however, no more contributions can be made, but the funds in the account can still be used to pay for medical expenses (even monthly health plan premium payments for employer-sponsored retiree health plans).

To be eligible for an HSA, a worker cannot be covered by any other health plan, cannot be enrolled in Medicare, and cannot be claimed as a dependent on another person’s tax return. Federal regulations regarding high deductible health plans and health savings accounts are still being finalized, and so changes to the regulations governing these plans are sure to take place in the next months and years.