Health Savings Account
What Is a Health Savings Account?
A health savings account (HSA) is a type of savings account that you can put money into for health-related expenses on a tax-free basis.
You can contribute to a health savings account only if you:
- have a high deductible health plan (HDHP)
- have no other medical insurance coverage, including Medicare– however, you are permitted to have other types of health-related insurance, such as accident, disability, dental care, vision care, or long-term care
- cannot be claimed as a dependent on someone else’s tax return
Both you and your employer can make contributions to your HSA. However, the total amount of the contributions cannot be more than an annual limit set by the government.
The 2011 maximum contribution limit for individual HSAs will hold steady at $3,050, and for the family HSAs will continue to be $6,150. The 2011 high-deductible health plan maximum annual out-of-pocket limit for individuals will be $5,950, and the maximum family limit will be $11,900. The 2011 minimum HDHP deductible amounts for individuals and families will be $1,200 for individuals and $2,400 for families.
Any contributions made to your HSA must be cash; contributions of stock or property are not allowed. Also, you cannot make any contributions to your HSA when you enroll in Medicare. However, you can keep the money in your HSA and use it to pay for medical expenses tax-free.
Tax Benefits
According to the Internal Revenue Service (IRS), HSAs have the following tax-related advantages:
- You can claim a tax deduction for contributions you or someone other than your employer, make to your HSA.
- Contributions to your HSA made by your employer may be excluded from your gross income.
- Any interest or other earnings you make on the money in your HSA are tax free.
- Money that you take out of your HSA may be tax free if you pay “qualified” medical expenses.
You can find details about the tax benefits and rules (including examples of how HSAs work) in IRS Publication 969.
Signing Up for an HSA
Banks, credit unions, insurance companies and other financial institutions are permitted offer and oversee HSA accounts. Note that your HSA is not something you purchase; it’s a savings account into which you can deposit money on a tax-preferred basis.
What Is a High-Deductible Health Plan?
If you decide to open an HSA, you must have a high-deductible health plan (HDHP). An HDHP is an inexpensive (or less expensive) type of health insurance that does not cover you for the first several thousand dollars of health care expenses but typically will cover you after that.
You can use your health savings account to help pay for the expenses your health plan does not cover.
The amount of the required deductible and out-of-pocket expenses is adjusted annually to account for inflation.
Enrolling in a High-Deductible Health Plan
Any company that sells health insurance in your state may offer an HDHP. Your employer may offer an appropriate plan and you also should be able to find a qualified HDHP by contacting your current insurance company, or an agent or broker licensed to sell health insurance in your state. Your state insurance department may also be able to provide information about qualified HDHPs.
What are Qualified Medical Expenses?
IRS Publication 502 defines qualified medical expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.”
The health reform legislation (Patient Protection and Affordable Care Act) signed into law in March 2010 makes some changes to how you manage your HSA. Starting January 1, 2011, you can no longer be reimbursed on a tax-free basis for the costs of over-the-counter medications. And, the tax on distributions from your HSA that is not used for qualified medical expenses will increase from 10% to 20%.