WITHDRAWALS

HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses. These include deductibles and coinsurance as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; purchase and use of qualifying over-the-counter medications; and transportation expenses related to medical care.
There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks for account holder use, and some allow for a reimbursement process similar to other types of insurance. Most HSAs have more than one possible method for withdrawal. The exact method of withdrawal varies from HSA to HSA and can be considered a marketing design issue. Checks and debits do not have to be made payable directly to the provider. However, in the case of an audit, account holders will be expected to provide documentary evidence that the transaction was for a qualified expense in order to avoid making the amount in question subject to income tax plus a 10% tax penalty for early withdrawal.
The 10% tax penalty is waived for persons who have reached the age of 65 or have become disabled by the time of the withdrawal. Then, only income tax is paid on the withdrawal, and in effect the account has grown tax free (similar to an IRA). Medical expenses continue to be tax free.

INVESMENTS

Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).
While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k), and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one time IRA rollover allowed above. Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.

DEPOSITS

Deposits to an HSA may be made by any policyholder of a qualified High Deductible Health Plan (HDHP), by an employer on behalf of a policyholder, or any other person. If an employer makes deposits to an HDHP on behalf of its employees, non-discrimination rules apply — that is, all employees must be treated equally. However, if contributions are made through a section 125 plan, non-discrimination rules do not apply. Employers may treat full-time and part-time employees differently, and employers may treat individual and family participants differently. (The treatment of employees who are not enrolled in a HDHP is not considered for non-discrimination purposes.) Also, for 2007, employers may contribute more for non-highly compensated employees than highly compensated employees.
Contributions from an employer or employee may be made on a pre-tax basis through an employer. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease gross taxable income on the following year's Form 1040. The main advantage of making pre-tax contributions is the FICA and FUTA deduction, which amounts to a savings of 7.65% to the employer and employee. Regardless of the method or tax savings associated with the deposit, the deposits may only be made for persons covered under a HDHP, with no other coverage beyond certain qualified additional coverage.