Health Savings Account (HSA)

Last Updated: February 21, 2019

Definition - What does Health Savings Account (HSA) mean?

A health savings account (HSA) is one of several types of so-called health spending accounts. Each type of spending account has different characteristics and qualifications on their use. The HSA allows an individual to save and use pre-tax income to pay for medical costs. These funds may be used to pay deductibles or other expenses related to health care that are not covered by the person's health care plan. Funds saved in an HSA may also be used to pay the medical expenses of the account holder's spouse or dependents. HSAs can only be used in conjunction with a high-deductible health insurance policies.

WorkplaceTesting explains Health Savings Account (HSA)

Health savings accounts (HSA) are designated tax-exempt under federal law. To qualify for this status, HSA funds must be spent on qualified medical expenses. If funds are used for something other than medical expenses, then income tax must be paid on any amounts spent.

An HSA is controlled by a trustee who makes distributions on behalf of the account holder. Often an individual's health care plan will serve as the HSA trustee. HSA trustees must be approved by the IRS to serve in this capacity. Individuals may choose to fund their HSA using a pre-tax deduction from their employment pay. Alternatively, an individual may deposit funds into an HSA and then take an income tax deduction for the amount deposited.

In addition to the ability to use pre-tax income to pay for medical expenses and deductibles, health savings accounts have other benefits. A HSA is not owned by or held by an individual's employer. Thus, the funds are available even if the account owner changes jobs. HSAs also allow individuals to decide how and with whom to spend their health care dollars. Money placed in an HSA remains in the account until needed. There is no time limit on using the funds like there are for certain other medical expense accounts.

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