How Does HSA Work?

How Does HSA Work?

Health Savings Accounts

HSAs, or Health Savings Accounts, work by helping Americans enrolled in a high-deductible health plan save money to use for medical expenses. The money deposited in a HSA is not federally taxed when deposited. The funds also roll over from year to year. The money saved in a HSA can also be withdrawn for medical expenses without incurring any federal tax liability. There are varying taxes if withdrawn for non-medical reasons.

How Deposits in a HSA Work

Both individuals and employers can deposit money into a HSA. Employers, however, have the power to decide just how much is deposited. For example, an employer might decide that full-time employees get more money deposited than part-time employees. Also, the employer might not have the option of depositing the funds before they are taxed. If they are deposited after they have been taxed, the funds can be used to decrease the taxable income on the tax form 1040.

How Withdrawals Work in a HSA

HSA participants can withdraw funds at any time without penalty, as long as they are for qualified medical expenses. Participants do not have to get pre-approval from the HSA trustee or insurance to withdraw. Funds can be used for co-payments, dental, vision, and chiropractic care, which are often not covered by traditional health insurance plans.

Funds can be withdrawn by using a debit card or check attached to the account, although some HSAs use a reimbursement process instead. Most HSAs will give the user a choice of withdrawal methods. Funds that are not withdrawn for approved purposes can incur income taxes and a 10% penalty, with the exception of people who are over the age of 65 or have been disabled.