Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Health Savings Accounts (HSA)

Summary and Exercises

Summary

An HSA is a tax-exempt trust or custodial account that a taxpayer sets up with a qualified HSA trustee to pay for or reimburse certain medical expenses a taxpayer incurs.

Eligibility

A taxpayer must be an eligible individual to qualify for an HSA. See specific qualifications outlined earlier. A high-deductible health plan (HDHP) is health coverage with:

  • A higher annual deductible than typical health plans, and
  • A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that the taxpayer must pay for covered expenses. Out-of-pocket expenses include co-payments and other amounts, but do not include most premiums.

An HSA is created by:

  • Enrolling in an HDHP, and
  • Establishing the HSA

Contributions, Distributions, Deductions, and Form 8889

The amount the taxpayer or any other person can contribute to the taxpayer's HSA depends on the type of HDHP coverage, the taxpayer's age, the date the taxpayer became an eligible individual, and the date the taxpayer is no longer an eligible individual. In addition, the contribution limit for an HSA is reduced by employer contributions.

HSAs enable taxpayers to pay for current medical expenses and save for future qualified medical expenses on a tax-free basis. The following forms are used to report HSA activities:

  • Form 5498-SA to report contributions to a taxpayer's HSA. Employer contributions will also be shown in Form W-2, box 12—may include employee contributions under a Section 125 Cafeteria Plan (pretax dollars).
  • Form 1099-SA to report HSA distributions for the year.
  • Form 8889, Health Savings Accounts, Part I, to report contributions and calculate the HSA deduction.
  • Form 8889, Health Saving Accounts, Part II, to report HSA distributions and report qualified medical expenses. Amounts that are taxable are calculated, and the 20% additional tax is also shown here.
  • Form 8889, Health Savings Accounts, Part III, is Income and Additional Tax for Failure to Maintain HDHP Coverage. This part of the form is out of scope. Refer taxpayers with these issues to a professional tax preparer.

Funds in an HSA can remain in the account and are carried over, without limit, from year to year until the taxpayer uses them. Interest or other earnings on the assets in the account are tax-free.

Taxpayers can receive tax-free distributions from their HSA to pay or be reimbursed for qualified medical expenses that are incurred after establishing the HSA.

Qualified medical expenses are those expenses that would generally qualify for the medical and dental expense deduction on Schedule A of Form 1040.

There are recordkeeping requirements for HSA distributions. See Publication 969 for additional information.