Is a Catastrophe Savings Account the Same as an HSA?
Understand the key differences between catastrophe savings accounts and HSAs, including tax treatment, eligibility, and permitted uses.
A catastrophe savings account (CSA) and a health savings account (HSA) both help individuals prepare for unexpected expenses but serve different purposes. An HSA is a tax-advantaged way to cover medical costs, while a CSA is designed for disaster-related expenses like hurricane damage or flooding.
Legal Recognition
A catastrophe savings account (CSA) and a health savings account (HSA) are both recognized under U.S. law but follow different legal frameworks. An HSA is established under Section 223 of the Internal Revenue Code, defining its tax advantages and eligibility requirements. These accounts are federally regulated, ensuring uniform benefits and restrictions across all states.
A CSA, however, is a state-specific financial tool, primarily recognized in disaster-prone states like Mississippi. Its legal foundation is based on state legislation, leading to variations in rules depending on location. Unlike HSAs, which require enrollment in a high-deductible health plan (HDHP), CSAs are linked to disaster preparedness, with state governments setting the parameters for their use.
Eligibility Criteria
Eligibility for a catastrophe savings account (CSA) or a health savings account (HSA) depends on specific requirements.
To open an HSA, an individual must be enrolled in an HDHP as defined by the IRS. For 2024, an HDHP must have a minimum deductible of $1,600 for individuals or $3,200 for families, with maximum out-of-pocket expenses capped at $8,050 and $16,100, respectively. Individuals cannot be enrolled in Medicare, have non-HDHP insurance, or be claimed as a dependent on someone else’s tax return.
CSAs have eligibility rules set by state legislation. Mississippi, one of the few states with an active CSA program, limits eligibility to homeowners with a primary residence in a disaster-prone area. Funds must be used exclusively for qualified disaster-related expenses. Unlike HSAs, there are no federal restrictions on income or insurance status when opening a CSA.
Contribution Rules
Contribution limits for catastrophe savings accounts (CSAs) and health savings accounts (HSAs) differ based on their governing regulations.
For an HSA, the IRS sets annual contribution limits. In 2024, individuals can contribute up to $4,150, while those with family coverage can contribute up to $8,300. Individuals aged 55 and older can make an additional $1,000 catch-up contribution. Contributions can come from the account holder, an employer, or a family member, but the total cannot exceed the annual cap. Excess contributions are subject to a 6% excise tax unless withdrawn before the tax filing deadline.
CSAs follow state-specific contribution rules. Mississippi allows homeowners to contribute up to $2,000 if their insurance deductible is $1,000 or less. If the deductible exceeds $1,000, the contribution limit rises to $15,000. Unlike HSAs, which allow contributions from multiple sources, CSA funding typically comes solely from the account holder, with no employer contributions permitted.
Permissible Withdrawals
Withdrawals from a catastrophe savings account (CSA) or a health savings account (HSA) must be used for specific purposes to avoid penalties.
HSA funds must be used for qualified medical expenses as defined by the IRS, including doctor visits, prescription medications, surgeries, and certain over-the-counter drugs with a prescription. Dental and vision care, such as braces or eyeglasses, also qualify. Non-medical withdrawals before age 65 incur ordinary income tax plus a 20% penalty. After 65, withdrawals for non-medical expenses are taxed as income but are not subject to the penalty.
CSAs are intended for disaster recovery. Eligible expenses typically include home repairs, temporary housing costs, and insurance deductibles not covered by insurance payouts. Some states allow funds to be used for preventative measures like storm shutters or flood barriers. Unauthorized withdrawals trigger penalties and state income tax liabilities.
Tax Treatment
The tax advantages of catastrophe savings accounts (CSAs) and health savings accounts (HSAs) differ due to their distinct purposes and governing regulations.
HSAs offer a triple tax benefit at the federal level. Contributions are tax-deductible, reducing taxable income in the year they are made. Earnings grow tax-free, and withdrawals for qualified medical expenses remain untaxed. Most states follow federal tax treatment, though some, such as California and New Jersey, do not provide state tax deductions or exemptions for HSA contributions and earnings.
CSAs provide state-level tax benefits. In Mississippi, contributions are tax-deductible from state taxable income, and withdrawals for qualified disaster-related expenses are exempt from state income tax. However, non-qualifying withdrawals may be subject to state income tax and penalties. Unlike HSAs, CSAs do not offer tax-free growth on earnings, limiting their long-term financial benefits.
Common Misconceptions
Despite their similarities as specialized savings accounts, CSAs and HSAs are often misunderstood.
One common misconception is that CSAs can be used for medical expenses like HSAs. While both accounts offer tax advantages, a CSA is strictly for disaster-related costs. Another misunderstanding is that HSAs are only useful for those with frequent medical expenses. In reality, HSAs can serve as long-term investment vehicles, as funds roll over indefinitely and can be used tax-free for medical expenses in retirement.
Some also assume that CSAs are available nationwide. Unlike HSAs, which are federally regulated and accessible to anyone meeting the eligibility criteria, CSAs are only available in states that have enacted legislation to support them. Individuals outside these states cannot open or benefit from a CSA, regardless of their disaster preparedness needs.