What is an HSA (Health Savings Account)

An HSA is tax-favored savings account that is in conjunction with a high-deductible HSA-eligible health insurance plan to make healthcare more affordable and to save for retirement.



HSAs are similar to IRAs, but even better:

Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65.

Any HSA funds not used each year remain in the account, and earn interest tax-free to supplement medical expenses at any time in the future

What are qualified medical expenses?

HSAs can be used to pay for many types of medical expenses, even some that are often excluded on health insurance plans. These include:

Health insurance plan deductibles, copay- ments, and coinsurance

Prescription and over-the-counter drugs

Dental services, including braces, bridges, and crowns

Vision care, including glasses and lasik eye surgery

Psychiatric and certain psychological treat- ments

Long-term care services

Medically-related transportation and lodging

What are qualified medical expenses?

Typically HSAs cannot be used to pay health insurance premiums, although there are exceptions for:

Health insurance premiums if you are receiving federal or state unemployment benefits

Premiums for COBRA qualified health insurance

Certain qualified long-term care insurance premiums

Premiums for a health plan (other than a Medicare supplemental policy) for an individual age 65 or older

Note: You must establish an HSA before incurring any expenses or the expenses will not qualify.

How much can I contribute to my HSA?

Maximum yearly contributions (and associated tax deduction) are determined as follows:

For individuals, it is $2,850, and for families it is $5,650.

You do not have to contribute the maximum each year, although some HSAs require a small minimum monthly contribution.

Note: If you are between the ages of 55 and 65, you can make an additional annual "catch up" contribution (of up to $800 in 2007.)

Can I roll over funds from other accounts into my HSA?

You can make a one-time distribution from an IRA to fund your HSA, provided it doesn't exceed HSA contribution limits. Employees have the opportunity for a one-time, tax-free transfer of funds from their flexible spending account (FSA) or health reimbursement arrangement (HSA) to their HSA.

Is my money safe?

Funds in an HSA are held in a trust and are administered by a bank, insurance company, or other approved Trustee. This institution is often referred to as your HSA Administrator.

Funds in your HSA are invested at your discretion. Typically an HSA will allow you to choose from one or more of the following investment options:

Interest-bearing account

CDs

Money market funds

Mutual Funds

If you are looking to minimize your investment risk, you may want to consider an interest-bearing account; these accounts are FDIC insured. On the other end of the spectrum, mutual funds may provide a greater return, but are more risky, and are not FDIC insured.

How do I use the funds in my HSA?

Using funds in your Health Savings Account is easy:

Typically an HSA will provide you with a checkbook or debit card. When you pay for a qualified medical expenses, use the debit card or check to make the payment.

You do not need to get approval from the HSA administrator when you use funds in your account.

You do not need to submit receipts to the HSA administrator, although you should save them just as you keep receipts for other items that are deducted from your taxes.

NOTE: You must establish the HSA before you incur medical expenses otherwise the expenses will not qualify.

How do the tax savings work?

HSAs make it easy to save on your taxes:

At the end of each year, you will be sent a statement showing the amount you contributed to your HSA that year. You can deduct this amount provided it is less than or equal to the maximum allowable contribution.

Much like an IRA, HSA deductions are "above-the-line" and thus can be taken even if you do not itemize.

If you are self-employed, in addition to deducting your HSA contributions, you may be able to deduct 100% of your health insurance premiums, provided that:

You are not eligible to participate in a subsidized health plan offered by an employer or your spouse's employer.

The deduction does NOT exceed the amount of net income from your business.

Note: Check with your accountant or tax advisor for the specific federal and state tax benefits that apply to you.

For more general information and information on allowable expenditures please go to HSAInsider.com and download the PDF file HSA Road Rules