Health Savings Accounts are really a combination of a health insurance policy meeting minimum US Treasury policy design requirements called a High Deductible Health Plan (HDHP) and a separate custodial savings account for future medical expenses called a Health Savings Account (HSA). A health insurance company or an insurance plan usually provides the qualified health insurance policy. A licensed HSA administrator and financial services company, such as a bank, usually acts as the custodian and administers the savings account portion of the HSA.
The HSA is an account into which you can deposit pre-tax money to be used for future medical expenses. It’s like a savings account, but with an HSA the money can only be used to pay for medical expenses. The money in an HSA is owned and controlled by you, not your employer, health insurer or anyone else. If funds are only used for medical expenses, withdrawals are tax-free.
You can start a health savings account on your own through a bank or other financial institution, or your employer may offer a health savings account option.
To qualify for a health savings account, you must be under age 65 and purchase a HDHP which means that the insurance doesn’t pay for the first several thousand dollars of health care expenses. This unpaid portion of expenses is known as a deductible. Some high-deductible plans do cover preventive services, such as mammograms, before the deductible is met, so check your plan’s coverage details carefully.
This HDHP must be your only health insurance coverage, and you can’t be covered by other health insurance. However, you can have a policy covering a specific disease such as cancer, one providing a fixed payment for hospital coverage such as a daily benefit, or you can have one that provides supplemental accident, disability, dental, vision or long-term care benefits
You can use your HSA funds to pay deductible expenses, copays associated with the plan, and other noncovered health care expenses.
One thing to consider very carefully is what medical expenses are covered by your high-deductible plan. If you receive care for something that’s not covered by your high-deductible health insurance plan, the cost likely won’t count toward your deductible. .
The dollar amount of the deductible that qualifies as a HDHP changes each year, usually in step with inflation. In 2010, the minimum deductible for a single person is $1,150 and $2,300 for a family. Of course, you can select plans with a higher deductible, as a way to reduce insurance premiums.
On the other end, to qualify as a HDHP, the insurance must limit your out-of-pocket expenses to $5,800 for a single person and $11,600 for a family in 2010.
If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your contributions, up to a maximum of $3,000 for individuals and $5,900 for a family during 2010. There is a $1,000 “catch-up” provision if you are age 55 or older and the limits are indexed for inflation. Contributions are tax-deductible, like a Traditional IRA, for the individual even if the taxpayer does not itemize deductions on their tax return.
There are a couple of other factors to consider. For example, you are allowed a one-time rollover from a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) into your HSA, as well as a one-time rollover from an IRA into your HSA. In addition, amounts are no longer pro-rated by the month you start the plan. You can now make the full year’s contribution even if you start as late as December.
If your employer contributes for your plan, the total of your employer’s contribution plus your contribution still must be within contribution limits.
Summary for HDHP and HSA in 2010
| Single | Family | |
| Minimum Deductible to be a HDHP | $1,200 | $2,400 |
| Maximum Out-of Pocket to be a HDHP | $5,950 | $11,900 |
| Maximum Contribution to HAS | $3,050 (1) | $6,150 (1) |
(1) If age 55 or older, an additional $1,000 contribution is permitted.
Unspent money in your HSA can be rolled over each year. Money put into an HSA is yours and can be taken with you if you switch jobs or retire, unlike a Flexible Spending Account. Also, it’s important to know that in most cases you can’t have both an HSA and a Flexible Spending Account.
All withdrawals for medical expenses are tax free, regardless of your age. Funds can be used for any family member’s eligible medical expenses even though HSA accounts are individual accounts.
Withdrawals for nonmedical expenses prior to age 65 are subject to income tax and a 10% penalty. Withdrawals for nonmedical expenses at age 65 or older are subject to income tax, but avoid the 10% penalty.
What becomes clear, an HSA is not a “one size fits all” type of product. You will need to consider a wide range of factors, such as your family’s health, policy coverage and costs, and your tax situation to see if the HSA makes sense for you.
