Regarding the federal tax treatment of a Health Savings Account (HSA) paired with a qualifying high-deductible health plan, which statement is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
An HSA offers the well-known 'triple tax advantage' under IRC Section 223 when it is paired with a qualifying high-deductible health plan (HDHP): contributions are deductible above the line, the account balance grows tax-deferred, and withdrawals are tax-free so long as they pay for qualified medical expenses. Unlike a flexible spending account, the HSA is owned by the individual, is fully portable, and has no use-it-or-lose-it rule, so unused funds accumulate for future health costs. Only individuals covered by a qualifying HDHP may contribute, and the account holder must not be enrolled in disqualifying coverage such as a general-purpose FSA.
Why the other options are wrong
- B) HSA contributions are excluded from or deducted from taxable income, not included as income.
- C) Earnings are not taxed when distributed for qualified medical expenses; that is the core tax benefit.
- D) HSA balances roll over and accumulate; year-end forfeiture is an FSA rule, not an HSA rule.
Memory hook
HSA triple crown: deduct contributions, grow tax-free, withdraw tax-free for medical bills.