HSA funds may be used to pay for qualified medical expenses at any time without federal tax liability or penalty.
Beginning in early 2011 over-the-counter medications could not be paid with an HSA without a doctor's prescription, although that requirement was lifted as of January 1, 2020.
[1] Opponents observe that the structure of HSAs complicates the decision of whether to obtain medical treatment, by setting it against tax liability and retirement-saving goals.
HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which included the enactment of Internal Revenue Code section 223,[3] effective for tax years beginning after December 31, 2003, signed into law by President George W. Bush on December 8, 2003.
It is believed that the Affordable Care Act, which requires all employers with 50 or more employees to offer health insurance, may be fueling some of this growth.
High-deductible health plan premiums tend to be lower, and make an attractive option for both employers and employees.
[15] As of June 30, 2024[update], according to research conducted by Devenir, an estimated $137 billion is held in almost 38 million Health Savings Accounts.
If that option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease gross taxable income on the following year's Form 1040.
Initially, the annual maximum deposit to a health savings account was the lesser of the actual deductible or specified Internal Revenue Service limits.
California and New Jersey impose state income taxes on contributions, interest earned, and capital gains from health savings accounts.
Internal Revenue Code Section 408 prohibits a health savings account to invest in collectibles and life insurance policies, but health savings accounts can have investments in real estate, precious metals, public and private stock, notes, and more.
[citation needed] Health savings account participants do not have to obtain advance approval from their health savings account trustee or their medical insurer to withdraw funds, and their funds are not subject to income tax if they are made for qualified medical expenses.
As a response to the COVID-19 pandemic, the passage of the CARES Act once again made over-the-counter drugs reimbursable without a prescription for amounts paid after Dec. 31, 2019.
Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 20% penalty.
Prior to January 1, 2011, when new rules governing health savings accounts in the Patient Protection and Affordable Care Act went into effect, the penalty for non-qualified withdrawals was 10%.
Failure to retain and provide documentation could cause the IRS to rule that withdrawals were not for qualified medical expenses and subject the taxpayer to additional penalties.
Perhaps the most significant difference is that employers of all sizes can offer a health savings account and insurance plan to employees.
A higher deductible lowers the premium because the insurance company no longer pays for routine healthcare, and insurance underwriters believe that Americans who see a relationship between medical cost and their bank accounts will consume less medical care, shop for lower-cost options, and be more vigilant against excess and fraud in the health care industry.
Health savings accounts also give the flexibility not available in some traditional health plans to pay on a pretax basis for qualified medical expenses not covered in standard or HSA-eligible insurance plans, which may include dental, orthodontic, vision, and other approved expenses.
A recent industry survey found that in July 2007 over 80% of health savings account plans provided first-dollar coverage for preventive care.
[48] They in fact encourage customers of all backgrounds to constrain costly spending and obtain more preventive health care.
According to Stanford economist Victor Fuchs, "The main effect of putting more of it on the consumer is to reduce the social redistributive element of insurance.
"[50] Critics contend that low-income people, who are more likely to be uninsured, do not earn enough to benefit from the tax breaks offered by health savings accounts.
These tax breaks are too modest, when compared to the actual cost of insurance, to persuade significant numbers to buy this coverage.
While the potential upside from investment gains can be viewed as a benefit, the subsequent downside, as well as the possibility of capital loss, may make the health savings account a poor option for some.
[54] And information about the maintenance fees, interest rates and investment lineups of health savings accounts is not easy to find.
While a 2005 survey by the Blue Cross and Blue Shield Association found widespread satisfaction among health savings account customers,[56] a survey published in 2007 by employee benefits consultants Towers Perrin came to the opposite conclusion; it found that employees currently enrolled in such plans were significantly less satisfied with many elements of the health benefit plan compared to those enrolled in traditional health benefit plans.
Most participants were satisfied with their HSA-eligible plans and would recommend them to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible.
"[58] According to the Commonwealth Fund, early experience with HSA-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems.
[60][61][62] According to a 2006 Zogby poll, seven in ten voters back Congressional action to allow HSA participants to pay for their insurance premiums using money in their savings plans.