What are the advantages of establishing an HSA?

Contributions are tax deductible, even if individuals do not itemize deductions on Form 1040.

Account holders may make tax-free withdrawals from their HSA for qualified medical expenses not covered by the high-deductible health plan.

The interest or earnings on the assets in the HSA accumulate tax free.

If in the future an account holder is not covered by a high-deductible health plan, the account holder may still take tax-free withdrawals from the account for qualified medical expenses, but may not contribute additional amounts to the HSA.

If the account holder becomes disabled or reaches age 65, distributions can be made for non-medical reasons without penalty, but amounts must be reported as taxable income.

Employer contributions are excluded from taxable income, and employment taxes do not apply (saving you federal income tax, Social Security and Medicare taxes).

Contributions can be made through a cafeteria plan on a pre-tax basis. Account holders may also make tax-free withdrawals from the HSA to pay Medicare premiums (except Medicare Supplement Policies), long-term care coverage, health coverage while receiving unemployment benefits or health care continuation coverage required by federal law (known as COBRA coverage).

Contributions remain in the HSA from year-to-year until they are used. There is no "use-it-or-lose it" provision as there is with a flexible spending account.

HSA account holders self-substantiate expenses. The HSA administrator will not require that you provide documentation prior to receiving reimbursement. HSA account holders must retain documentation for their own records, however, to document the eligibility for the IRS.

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