Many employers offer high-deductible health plans (HDHPs) to control premium costs, and then pair this coverage with health savings accounts (HSAs) to help employees with their health care expenses. A health savings account is a tax-favored trust or account that can be contributed to by, or on behalf of, an eligible individual for the purpose of paying qualified medical expenses.

  • HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, FICA tax and most state income taxes. Due to anHSA’s potential tax savings, federal tax law imposes strict requirements for health savings account eligibility, contributions and distributions.
  • The basic rules for HSAs are contained in Internal Revenue Code (Code) Section 223. Since Code Section 223 was enacted in 2003, the Internal Revenue Service (IRS) has issued guidance on HSAs, mainly in the format of questions and answers (Q&As). This Compliance Overview includes key compliance Q&As that the IRS has issued on HSAs, with updates for current cost-of-living adjustments.

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This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

HIGHLIGHTS

ELIGIBILITY RULES

To be HSA-eligible, an individual must:

  • Be covered by an HDHP;
  • Not be covered by other health coverage that is not an HDHP (with certain exceptions);
  • Not be enrolled in Medicare; and
  • Not be eligible to be claimed as a dependent on another person’s tax return.

DISTRIBUTION RULES

  • HSA owners may take distributions from their accounts at any time, even if they are no longer eligible for health savings account contributions.
  • HSA distributions are not taxable if the funds are used to pay for qualified medical expenses that were incurred after the HSA was established.

LINKS AND RESOURCES

 

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.