An HSA is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. HSAs are available to any employer or individual for an account beneficiary who has high-deductible health insurance coverage. An eligible person or an employer may establish an HSA with a qualified HSA custodian or trustee. No permission or authorization is needed from the IRS to set up an HSA.
Although an HSA is similar to an IRA in some respects, a taxpayer cannot use an IRA as an HSA, nor can a taxpayer combine an IRA with an HSA. In certain situations, a taxpayer can take a qualified funding distribution from an IRA to fund an HSA.
2. What Are the Advantages of an HSA?
Tax benefits include an income tax deduction on the federal level and in most states, payroll tax avoidance, tax-deferred earnings growth and tax-free distributions.
The nontax benefits of HSAs are also significant. The account balance rolls over from year to year. The HSA is transferable and remains after separation from service.
Account owners own the money in their HSA and can use it as they see fit, and they pay lower insurance premiums.
3. What Are the Disadvantages of HSAs?
Many of the disadvantages of HSAs are only in comparison with traditional low- or no-deductible health insurance. Under current law, HSAs must be paired with a high-deductible health plan.
An account owner may face a large medical expense before they have time to build a sufficient balance in the HSA. They also must take more responsibility to "shop around" for their health care spending. They must handle tax reporting and save medical receipts, along with learning the HSA rules and following them to avoid negative tax consequences.
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