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.
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:
An HSA is created by:
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:
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.