A health savings account (HSA) has these features:
- An HSA is a savings account at a financial institution that allows a person to save money for out-of-pocket medical expenses.
- Workers can contribute part of their paycheck; contributions deposited into the account are tax-deductible.
- Employers are also allowed to contribute to an employee’s account, and contributions are excluded from the employee’s gross income.
- The account is owned and controlled by the individual.
- Withdrawals from the account are not taxed, as long as the money is used to pay for qualified medical expenses of the employee or the employee’s family (such as hospital, doctor, dentist, prescription drugs, physical therapy, long-term care, contact lenses, eyeglasses, lab expenses, etc.).
- Money withdrawn from the account that is not used to pay for qualified medical expenses is subject to income tax; if before age 65, an additional 20% penalty is imposed.
- Any unused amount deposited in a particular year can be carried over to the following years.