Health Savings Accounts (HSAs): A Comprehensive Guide

A health savings account is a tax-advantaged savings vehicle that allows people to save money to pay for medical expenses. To have a health savings account, you must also buy a qualifying high-deductible health insurance plan. They came into being in 2003, with the passage of the Medicare Prescription Drug Improvement and Modernization Act. Premiums are typically lower than for other conventional health plans, because the insurance company does not cover routine care.

Taxation

• Contributions to HSAs are tax-deductible. Money in the accounts grows tax-deferred as long as it is left in the account. Withdrawals for qualifying medical expenditures are tax-free. Withdrawals for other purposes are taxed as income, plus a 10 percent penalty, except for individuals over age 65 or who are disabled.

Limits

• The maximum contribution limits for HSAs are $5,950 per year for a family and $3,000 for individuals, as of October 2010. Taxpayers over age 50 can contribute an additional $1,000 in catch-up contributions

High Deductible Health Plans

• To own an HSA, you must be enrolled in a high-deductible health plan (HDHP). These are catastrophic insurance plans with minimum deductibles of $1,200 for an individual and $2,400 for a family, as of 2010. The policies must also have maximum out-of-pocket costs of $5,950 per year for an individual and $11,900 for families.

Rollover Provisions

• Assets in an HSA accumulate from year to year if not spent. This distinguishes them from Flexible Spending Arrangements, which reset to zero every year.