Definition
A tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP), allowing pre-tax contributions to pay for qualified medical expenses with funds that roll over indefinitely.
US Context
HSAs are governed by Section 223 of the Internal Revenue Code. HSA contribution limits and HDHP parameters are adjusted annually by the IRS. HSAs have grown significantly in popularity — over 36 million accounts held more than $116 billion in assets as of 2023. Many employers now offer HDHPs with HSA options as their primary or sole health plan. HSA funds can be invested in stocks, bonds, and mutual funds once account balances reach a custodian-specified threshold.
Best Practices
- Verify employee HDHP enrolment and HSA eligibility before processing contributions
- Consider making employer seed contributions to encourage HDHP/HSA adoption and offset employee cost concerns
- Educate employees on the triple tax advantage and long-term investment potential of HSAs
- Monitor combined employer and employee contributions to prevent exceeding annual IRS limits
Frequently Asked Questions
What is the difference between an HSA and an FSA?
HSAs require HDHP enrolment, roll over indefinitely, are portable, and can be invested. FSAs do not require an HDHP, generally have a use-it-or-lose-it rule (with limited rollover or grace period options), and are forfeited when employment ends. HSAs offer greater flexibility and long-term savings potential.
Can HSA funds be used for non-medical expenses?
Yes, but withdrawals for non-qualified expenses before age 65 are subject to income tax plus a 20% penalty. After age 65, non-qualified withdrawals are taxed as ordinary income but the penalty is waived, making the HSA function similarly to a traditional IRA.
Do HSA funds expire?
No. HSA funds roll over indefinitely from year to year and remain with the account holder even after changing jobs, retiring, or losing HDHP coverage. This is a key advantage over FSAs.