Health Savings Accounts Gain Popularity: Is It the Right Choice for You?

By Chris L. Meacham, CPA,

Cornerstone Wealth Management

A health savings account (HSA) is an account created for those with high-deductible health plans in order to help them save for medical expenses not covered by their plan. Either the individual or the individual’s employer contributes to the account, and these contributions can be used to pay for qualified medical expenses, including prescriptions, deductibles and co-payments. According to the

Employee Benefit Research Institute

, 7.2 million people had an HSA in 2013—a substantial increase from 6.6 million in 2012. So why this boost in HAS’s popularity?

One of the main reasons for the rise in HSAs is the federal tax advantages they offer. Provided they’re used for qualified medical expenses, funds contributed to an HSA can be deducted for federal income tax purposes. Also, none of the income the account earns will ever be taxed. Annual HSA contributions are currently capped at $3,300 for individuals and $6,550 for families.

Another benefit of an HSA is that the money saved can be rolled over to the following year, so the funds can be used for medical expenses later on in life when health issues are more likely to occur. Many HSAs also come with savings and investment options, enabling people to save money for their retirement.



use HSA funds for expenses not on the list of qualified medical expenses—including non-medical related expenses—provided they’re willing to pay a 20 percent penalty and federal income taxes on those funds. If the account owner is 65 or older and withdraws money from an HSA for anything other than qualified medical expenses, the 20 percent penalty no longer applies, but he or she will still owe federal income taxes on it.

Unlike most other states, however, California


require HSA contributions and all interest and dividends the account earns to be reported on state tax forms. This doesn’t necessarily mean that Californians shouldn’t get an HSA. But it does mean that you should talk to your CPA or financial professional to make sure it is the best choice for you.