Certified Plan Sponsor Professional (CPSP) Practice Exam

What advantage do HSAs offer regarding contributions?

1. Contributions are subject to income tax reduction.

2. Contributions are fully deductible from taxable income.

3. Contributions can be made after retirement.

4. Contributions are limited to employer-only funding.

The correct answer is: Contributions are fully deductible from taxable income.

Health Savings Accounts (HSAs) provide significant tax advantages that encourage individuals to save for qualified medical expenses. The correct choice emphasizes that contributions to an HSA are fully deductible from taxable income. This means that individuals can contribute pre-tax dollars, which reduces their overall taxable income for the year. As a result, the contributions lower the individual's tax liability, which can lead to significant savings. Moreover, this deductibility applies regardless of whether the individual itemizes deductions or takes the standard deduction on their tax return. The tax benefits of HSAs make them a compelling option for individuals looking to manage healthcare expenses effectively. While other options suggest various scenarios, they do not capture the primary tax benefit that HSAs offer in terms of contributions. For instance, some HSAs can indeed receive contributions even after retirement, but those contributions may not always be deductible in the same way. The concept that HSAs can only have employer funding inaccurately suggests limited access for individuals when, in fact, individuals can also contribute directly to their HSAs.