How to Fund an HSA

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A Health Savings Account (HSA) can offer tax-advantaged ways to save and pay for eligible medical expenses. Employers may fund the HSA or allow employees to contribute to it with before-tax dollars. Individuals can also fund an HSA with after-tax dollars and benefit from tax deductions. Transferring funds from an IRA or other retirement savings vehicle is another option.

  • Check with your employer to see if HSA contributions are available. Companies can contribute to an HSA for employees even if they don't offer health insurance. Employer contributions are not taxable for the employer or the employee.

  • Find out if an employer provides a Section 125 "cafeteria plan" or flexible benefit program. If so, an employee may be able to contribute before-tax dollars to an HSA. But choosing this method means you cannot deduct contributions when filing your taxes.

  • Consider other sources that can be used to fund an HSA, such as an IRA or Archer medical savings account. Individuals have the option to make a one-time transfer of IRA funds to an HSA, up to annual contribution limits. Archer MSA rollovers are allowed within 60 days of withdrawing MSA funds. To use 401(k) dollars to fund an HSA, an individual must pay applicable taxes on the withdrawal.

Tips & Warnings

  • To contribute to an HSA, individuals must first have medical coverage through an HSA-qualified High Deductible Health Plan (HDHP).
  • When evaluating funding options, consider consulting a tax adviser.
  • For self-employed individuals, HSA contributions cannot be made with before-tax dollars. Only after-tax contributions and deductions are allowed.
  • Combined HSA contributions from all sources (an employer, an individual or rollovers and transfers) cannot exceed annual limits set by the Internal Revenue Service. Otherwise, a tax penalty may apply. Make sure total annual contributions are within IRS limits.
  • Rules governing HSAs can change. Also, additional requirements may apply to certain types of HSA funding, such as rollovers and transfers. Check with your employer, the institution that holds the HSA or the U.S. Treasury Department for up-to-date and complete information.

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