Which combination correctly describes the federal tax treatment of a Health Savings Account (HSA)?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The HSA offers the most favorable tax treatment available among health savings vehicles, often called the triple tax advantage: contributions made by or on behalf of the account owner are deductible from income (or made pre-tax through payroll), the earnings inside the account accumulate without current taxation, and withdrawals are tax-free so long as they are used for qualified medical expenses. This favorable structure is the central reason HSAs are paired with high-deductible health plans in consumer-driven arrangements, and it is directly tested under the CDHP material in AH-III.A.1b.
Why the other options are wrong
- B) After-tax contributions and annually taxed earnings would eliminate two of the three tax advantages, so this is incorrect.
- C) Taxing earnings annually and taxing withdrawals would leave only the contribution deduction, contradicting the triple advantage.
- D) Qualified HSA withdrawals are tax-free, not taxable, once the funds are used for eligible medical expenses.
Memory hook
Triple play: money in is tax-free, growth is tax-free, medical use is tax-free.