The federal tax law offers a triple tax advantage for funds in a Health Savings Account (HSA). Which statement correctly describes that advantage?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The HSA is designed to provide a triple tax advantage under federal tax law. First, contributions, whether made by the employee, employer, or self-employed individual, are deductible or excluded from gross income. Second, earnings on the account grow tax-free. Third, withdrawals used to pay qualified medical expenses are not taxed. This triple benefit makes the HSA attractive for consumers enrolled in a qualifying high-deductible health plan. No other consumer-directed arrangement offers all three tax benefits at once; an FSA, for example, is use-it-or-lose-it and not portable.
Why the other options are wrong
- B) Under the HSA rules both earnings and qualified withdrawals are tax-free, not taxable; this answer describes a taxable account, not an HSA.
- C) Contributions to an HSA are deductible or excluded from income, so they are not taxable; only nonqualified withdrawals are taxed.
- D) Both employer and employee HSA contributions receive the tax advantage, so saying employee contributions are always taxable is incorrect.
Memory hook
HSA = 3 tax wins: put it in free, grow it free, spend it free. Triple means all three.