A health savings account (HSA) is a personal bank account with significant tax advantages that can be used by an individual to pay for medical expenses, typically on high-deductible health insurance plans. A wide variety of banking institutions around the country offer these types of accounts to single users and families.

People with HSAs need to be enrolled in a compatible, high-deductible health plan (HDHP) to properly utilize their benefits. They can then use the money from their HSAs for qualified medical expenses, which can be determined by reviewing the HDHP. 

Additionally, unlike most flexible spending accounts (FSAs), the funds in HSAs are automatically rolled over year after year and can be used indefinitely so long as the purchase is a qualified medical expense. This is particularly attractive for younger, healthy individuals who don’t utilize the sum of their yearly contributions by the time the term resets.

Use the following resource for more differences between HSAs and FSAs.

There’s a limit to the amount that a person or family can contribute to their HSA each year, as determined by the Internal Revenue Service (IRS).

When identifying these maximums—which are adjusted or affirmed each year—the agency takes into account changes in the cost of living, among a number of additional factors.

Both the employer and employee may contribute to HSAs, and employees are permitted to make contributions either through automatic deposits from regular payroll deductions or through manual deposits. With the latter method in mind, full tax benefits won’t be realized until the person has filed their taxes.

According to the IRS, contributions that employers make to their employees’ HSAs “generally aren’t subject to employment taxes” and can be deducted on business income tax returns according to the year in which they were made. These contributions must be reported in box 12 of the Form W-2 filed for each employee.

Related Terms: Employee Benefits