Individual contributions result in an above-the-line deduction on your tax return. Any contributions made by your employer are not taxable to you. Self-employed individuals and employers can deduct contributions as well as insurance premiums. Individuals not covered by an employer’s plan can purchase a qualified medical insurance policy on their own and make tax-deductible contributions. However, premiums are not tax deductible for individuals.

Money in the HSA can be spent tax free on health care expenses, including eye care, dental expenses, prescription and nonprescription drugs, COBRA premiums, and qualified long-term-care services. Unlike flexible spending accounts, you don’t have to use all the money in the current year. Any unused amounts stay in your account and grow tax deferred. Thus, individuals who can afford to pay their deductibles from personal funds can use the HSA as a way to save funds on a tax-deferred basis. If you use the funds before age 65 for other than qualified medical expenses, you must pay income taxes as well as a 10% penalty on the funds. After age 65, the 10% penalty is waived. At all times, the money in the account belongs to you.

After age 65, you can’t make new contributions to an HSA, but you can still use money in the account to pay medical expenses, including premiums for Medicare Part A and B and the employee’s share of medical insurance premiums paid by an employer.