October 5, 2006 5:52 AM
How Do HSAs Work?
Funds contributed to an HSA belong to the account beneficiary and are completely portable. Money can accumulate in the account with tax-free earnings every year. Unused amounts remain available in later years.
Tax-advantaged contributions can be made by the individual and family members. An individual's employer also can make contributions, and neither the employer nor the employee will be taxed. Employers with "cafeteria plans" can allow employees to contribute untaxed salary through a salary reduction plan.
Qualified medical expenses include payments for the diagnosis, cure, mitigation, treatment or prevention of disease, including prescription and over-the-counter drugs. (Qualified medical expenses are defined in Internal Revenue Code Section 214.)
HSAs are usually administered by a financial institution or a life insurance company. Because HSAs were established under federal law, the Office of the Insurance Commissioner does not have authority over laws pertaining to HSA administrators.
The rules that apply to HSAs are similar to those that apply to Individual Retirement Accounts and Medical Savings Accounts.
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