Health Savings Account (HSA) 101

A Health Savings Account (HSA) is designed to give you an alternative to the rising costs of health care. With a health savings account you can contribute all for a portion of your health plan deductible info a tax-advantaged savings account with certain limits.

Another great benefit to a HSA is your dividend earnings are tax-free and funds remain tax-free as long as you use them to pay for qualified medical expenses. Qualified medical expenses can also include medical expenses that your health care plan doesn’t cover. Distributions (withdrawals) made that are not for qualified medical expenses prior to age 65 are subject to taxes and a 10 percent penalty.

To qualify for a HSA you need to have health care coverage under a high-deductible health care plan (HDHP). You cannot be covered by another health plan, this doesn’t include dental or vision plans. You also can’t be claimed as a dependent on another person’s tax returns or be entitled to Medicare benefits to qualify for a HSA.

Funds in the HSA that are not used in a particular year can be rolled over into the following year allowing your funds to grow annually to save for future medical expenses.

The Internal Revenue Service (IRS) imposes a penalty on excess contributions made into a HSA, but under certain circumstances allow for corrective distributions to be made. You also have to pay taxes on any dividends earned on those excess funds.

If you stop participating in a high deductible health care plan you can spend any funds remaining in your HSA to pay for qualified medical expenses but you can no longer contribute any new funds into the HSA.