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WalletPrep worksheet · Taxes

What is an HSA and how does it work?

Name ____________________ Date __________

Key ideas

  1. You need a high-deductible health plan. Only people covered by a qualifying high-deductible plan, and no other general health coverage, can put money into an HSA.
  2. The tax break works three ways. Money goes in before tax, grows without tax, and comes out tax-free for qualified medical costs. In the example, Priya saves $1,305.
  3. The money is yours to keep. Unused money rolls over every year and stays with you when you change jobs. Nothing is lost at year end.

Vocabulary

Traditional IRA
An IRA where contributions may be tax-deductible now, and withdrawals in retirement are taxed as income.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Insurance deductible
The amount you pay yourself on a covered loss or medical bill before your insurance starts to pay.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.

Work it out

Priya is single, has a self-only HDHP and is in the 22% federal bracket. She contributes the full $4,400 through payroll this year.

  1. Contributed through payroll
  2. Federal income tax saved (22%)
  3. Payroll tax saved (7.65%)
  4. Real cost to Priya
  5. Total tax saved
  6. Share of contribution saved

Check yourself

  1. Which of these do you need to contribute to an HSA?

    • A. Any employer health plan
    • B. A high-deductible health plan
    • C. Medicare
    • D. A flexible spending account

  2. You are in the 12% federal bracket and put $2,000 into an HSA through payroll. About how much federal income tax do you save?

    • A. $120
    • B. $153
    • C. $240
    • D. $2,000

  3. What happens to HSA money you don't spend by December 31?

    • A. It is lost
    • B. It goes to your employer
    • C. It is taxed as income
    • D. It rolls over and stays yours

Your turn

Check whether your health plan is HSA-eligible in your benefits portal or plan documents. If it is, set a payroll contribution for this year, even $50 a paycheck, and make a folder for medical receipts.

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Answer key

What is an HSA and how does it work?

Work it out

  1. Contributed through payroll$4,400
  2. Federal income tax saved (22%)− $968
  3. Payroll tax saved (7.65%)− $337
  4. Real cost to Priya= $3,095
  5. Total tax saved$1,305
  6. Share of contribution saved29.66%
  1. Her contribution skips federal income tax: $4,400 × 22% = $968.
  2. Because it goes through payroll, it also skips Social Security and Medicare tax: $4,400 × 7.65% = $337.
  3. She saves $968 + $337 = $1,305, so the $4,400 in her HSA costs her only $3,095 of take-home pay. State tax savings, if any, come on top.

Check yourself

  1. B. A high-deductible health plan Only people covered by a qualifying high-deductible health plan, with no other general health coverage, can contribute.
  2. C. $240 $2,000 × 12% = $240 in federal income tax. Through payroll you also skip $153 of Social Security and Medicare tax.
  3. D. It rolls over and stays yours HSA money never expires. It rolls over each year and stays with you if you change jobs.