Here are three answers to three basic questions employees might have about HSAs:

#1: Are there tax benefits to making an HSA contribution?

Yes. HSA owners making an HSA contribution enjoy a number of tax benefits including:

• Federal Income Tax Deduction. HSA contributions reduce an HSA owner's income for federal income tax purposes.

• State Income Tax Deduction. Most states with income taxes allow HSA owners to reduce the state taxable income by the amount of the HSA contribution.

• Payroll Tax Avoidance. HSA owners receiving HSA contributions pretax through an employer, either employer contributions or employee payroll deferral through a Section 125 plan, also avoid Social Security taxes, Medicare taxes (together with Social Security referred to as FICA), Federal Unemployment Taxes (FUTA), Railroad Retirement Act taxes, and in most cases State Unemployment Taxes (SUTA).

• Tax Deferred Earnings Growth. Any interest, dividends or other appreciation of the assets in an HSA grow tax-deferred while in the HSA.

• Tax-free Distributions. HSA owners that use the HSA for qualified medical expenses enjoy tax-free distributions. This is a better deal than traditional IRA or 401(k)s because those plans are only tax-deferred, not tax-free (although Roth IRAs/401(k)s distributions are tax-free, contributions made to Roth accounts are not tax deductible).

#2: How is an HSA similar to a 401(k) or an IRA?

HSAs have some obvious features that are common with retirement accounts including rollovers, portability, choice of investment types and risks, as well as survivor benefits. In addition to similarities, there are also advantages including:

• Exempt for paying FICA tax on contributions made from payroll

• Greater liquidity options – ability to keep funds in insured accounts if one desires as well as being able to move money for investments with greater return

• Can contribute both earned and unearned income

• Funds can be used at any time/any age for qualified medical expenses

• Can continue to contribute to account after end of employment

 #3: What are the employee's responsibilities regarding HSAs?

The bulk of the compliance burden for meeting the HSA rules rests with the individual employee including:

• Substantiation. The employee must substantiate that the distributions from the HSA were in fact used for qualified medical expenses by saving medical receipts in case of an IRS audit. Placing this burden on the individual relieves the employer of the arduous task of reviewing receipts and issuing reimbursement checks or otherwise facing some potential liability for failure by an employee to use the money appropriately. Employees generally welcome this change as well as it simplifies the process of paying or reimbursing for medical expenses, allows for more privacy, and gives employees the opportunity to be more aggressive in interpreting the definition of qualified medical expense.

• Eligibility. Although an employer and a custodian can help educate employees on the requirements to be eligible for an HSA, the ultimate responsibility to determine eligibility rests with the employee. An employee's participation in a spouse's health insurance plan or Flexible Spending Account (FSA) could jeopardize the employee's HSA eligibility as could participation in a government health care system such as the Veterans Administration's plan or Medicare.

• Maximum Contribution Limit. The employee is primarily responsible to ensure that the amount contributed to the HSA is within federal guidelines. Employers and custodians share a bit of the responsibility as employers cannot deduct more than the maximum HSA contribution limit for an employee and custodians cannot accept more than the family HSA limit plus one catch-up contribution ($7,750 for 2017). An employee that exceeds the limit may cause additional administrative work for the employer, the custodian and the individual, so it is in everyone's best interest to educate the employee on the limits.

• Management of HSA. Employees manage the balance in the HSA, select investments, choose beneficiaries, update contact information, pay for medical expenses and perform other maintenance issues generally without employer involvement.

• Tax Reporting/Payments. Employees are required to file an attachment (IRS Form 8889) to their income tax return each year they make a contribution or take a distribution. This includes employees that receive an employer-made contribution. This form is used by the IRS to ensure that the individual does not take a larger than permitted deduction and also ensures that the individual pays any taxes and penalties owed for noneligible distributions.

• Termination of Employment. Another positive feature of HSAs for both employers and employees is that the HSA remains open and viable after the employee's separation from service. Other than discontinuing any contributions into the HSA, the employer generally does not need to take any action regarding the separating employee's HSA.