Despite the fact that HSAs have been around for a while, there are still quite a few people that don’t understand what they are and how they work.
In simplified terms, a health savings account, or an HSA is considered to be a trust to be used solely for paying qualified medical expenses. The beneficiary of the account is the person who set it up.
To set up an HSA, the person must make sure the contribution is made in cash, unless it happens to be a rollover. They must also make sure their contribution, when it’s added to prior contributions for the calendar year, doesn’t exceed the limits for the year. An account like this must be set up at a bank or an insurance company, etc. and the money placed in the account is “only” for the HSA and not for life insurance.
There are two other requirements that need to be met to set up an HSA and they include: the money in the HSA may not be mixed with other property (there are some exceptions to this rule, so ask at the bank) and once the money is in the account it totally, without any doubt, belongs to the person who set it up and any rights in that account can’t be taken away.
This next requirement is one that many people don’t seem to know about, and that relates to HSAs being available to the person who sets up the account so long as they have high deductible health insurance coverage (HDHP). While an HSA does have some similarities to an IRA, an individual cannot use an IRA as an HSA or combine the two.
Once the account is set up, the person who opened it may contribute to it – so may that person’s employer, or both of them are able to make contributions, providing the total doesn’t go over what is allowed in that particular calendar year. Further good news for an individual making contributions is that those contributions are deductible from their income. On the other hand, if the employer is making the deposits, then they are excluded out of the worker’s income. Note: The HSA is exempt from income tax.
The one thing people need to be careful about when using the money in their HSA is that money taken out to pay for legit medical costs is not included in gross income. If money in the HSA is spent for something else, it is included in gross income and there may be a penalty. There are some exceptions, but they are few and far between.
Also be very aware that if the employer is making contributions to an HSA, that this is not part of a group health plan that falls under the COBRA continuation requirements. In other words, the plan isn’t obligated to make COBRA available if a person has an HSA.
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