A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). An HDHP is a health insurance plan that meets specific minimums regarding deductibles, specific maximums regarding out-of-pocket cost to the policyholder, and contains no co-payment features before the deductible is met. An HDHP can be either an individually owned policy or an employer-sponsored benefit.
The funds contributed to an HSA are not subject to federal income tax. If employees contribute to their HSA via payroll deduction, the tax savings is realized at the time of deposit. HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty; withdrawals for non-medical expenses will incur penalties. These accounts are a major component of consumer-driven health care.
HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA contributions may come from either an employer or an employee. Additionally, employee HSA contributions can be allowed as an expense within a cafeteria/flexible spending plan. This means that employee contributions into an HSA can be free of withholding, FICA, and Medicare tax. Unlike employee deferrals into the general FSA account, HSA funds roll over and accumulate year to year if not spent.
Here is a table showing the various minimum and maximum federal guidelines of the HSA environment.
HSA 2021 Limits
Contribution Limits (Employer/Employee Combined)
HDHP Deductible Minimums
HDHP Out-of-Pocket Maximums
Unlike HRAs and FSAs, there are no formal federal plan installation requirements imposed upon employers that install high deductible health plans and/or make contributions into employee health savings accounts. However, care must be taken to ensure that HRAs and FSAs co-ordinate with an HSA environment; otherwise, employers run the risk of endorsing a plan environment that will not pass the scrutiny of the Internal Revenue Service. The rules with respect to integrating HSAs with HRAs and/or FSAs are expressed by the IRS in a bulletin that was issued in 2008. Click on the link below for a copy of that bulletin; it is currently an invaluable resource in this arena.