An HSA is a tax-favored account that can be established with a qualified high deductible health insurance plan. The HSA allows you to contribute funds on a pre-tax or tax-deductible basis, which you may use to pay for eligible medical expenses. The health plan is used to cover serious illnesses or injuries, while the HSA is used for current or future expenses that are not paid by the health insurance plan. The plan can be contributed to by the employer, employee (on a pre-tax basis) or a combination of the two.
A major advantage of the HSA is there is no “use it or lose it” provision as you have in the FSA. And if you use the proceeds for qualified medical expenses then you’ll never pay taxes on the distribution whether it’s from the contributions or the interest on the contributions.
You’ll pay penalties if you with draw money from the HSA account if it’s not for qualified medical expenses before age 59 ½ at a lower rate than if you take it after age 65.
