HSA 101: The basics of the benefit

Millions of Americans have opened Health Savings Accounts (HSAs) since they were introduced in 2003. Used in conjunction with high deductible health plans, HSAs help individuals save money by making tax-deductible contributions for certain medical expenses.

You can establish an HSA if you meet certain conditions:

• You must be 18 or older and have a high-deductible health plan* with no additional general health coverage. (Other coverage for specific illnesses; vision, dental or long-term care; and/or disability insurance is allowed.)
• You can’t be enrolled in Medicare or be claimed as someone else’s dependent.

After opening a high deductible health plan through your employer, you are eligible to open an HSA account and can contribute up to $6,150 for family coverage ($3,050 for single) to the account this year. (The limit is adjusted for inflation by the IRS each year.) The contributions are made by pre-tax deductions from your paycheck or may be made through separate contributions paid by your employer.
Self-employed individuals can also take advantage of HSAs, only rather than establishing the high deductible health plan through an employer, they would establish their own high deductible health insurance policy and then open an HSA with a bank, insurance company, or authorized investment professional. Contributions would be made directly to the account rather than funneled through an employer.
In addition to providing a tax-deductible way of covering qualified medical expenses, HSAs have other benefits.

• The money remains tax-free as long as it’s used to pay for qualified expenses.
• The money remains in your account indefinitely, so you don’t have a deadline for spending it.
• The account will earn tax-deferred interest that, if used for a qualified medical expense, remains tax-free.
• The account is always yours even if you change jobs, move, change insurance providers, or get married or divorced.

Not all medical expenses are eligible for reimbursement. These standards are set by the IRS and are updated from time to time. Currently, for instance, smoking-cessation programs and drugs prescribed for nicotine withdrawal would qualify, but nicotine gum and nicotine patches would not. Other qualified expenses range from hearing aids, Braille books and orthopedic shoes to acupuncture, chiropractic services and home improvements needed for medical reasons. Visit www.irs.gov/taxtopics/tc502.html for more details, or talk with your bank or insurance company. representative to learn whether an HSA would work for you based on your particular health insurance circumstances. Enrolling is easy and the money-saving benefits are valuable.

This is for informational purposes only. Be sure to consult with your tax advisor before making any financial decisions.

*In 2010, the minimum limits set by the IRS for a health plan to be considered a high-deductible are $1,200 for individual coverage and $2,400 for family, with maximum out-of-pocket limits of $5,950 and $11,900, respectively.