What are the tax advantages of an HSA?

The tax advantages of an HSA make it a powerful long-term savings vehicle.

  • Employees can contribute funds to an HSA on a pre-tax basis, or contribute post-tax and recognize the same tax savings by claiming the deduction on tax returns.
  • HSA funds can be used to pay for eligible medical purchases at point of sale, or as reimbursement for out-of-pocket costs.
  • HSA funds earn tax-free interest. Unlike most savings accounts, interest earned on an HSA is not considered taxable income when the funds are used for eligible medical expenses.
  • Employers also enjoy tax benefits from HSAs, because employee contributions reduce taxable income, and in turn, the employer's payroll taxes.

Non-eligible purchase and contributions that exceed the yearly maximum contribution limit may be subject to tax penalties. Consult a tax professional to correct these penalties by April 15 of the following calendar year.

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