A health savings account (HSA) differs from a flexible spending account (FSA) in many ways. The big difference is that the money in a HSA is yours. You control how the money is spent and you keep any interest and investment earnings from the account. Unlike FSA contributions, you don’t lose the money in your HSA at the end of the year. You can keep saving your money in the HSA year after year even into retirement.
Anyone under age 65 can open a HSA if they are participating in an eligible high-deductible health plan (HDHP) that has a minimum deductible of $1,200 for individual and $2,400 for family coverage; these are the 2011 federal law requirements and may change each year. Review your plan options to find out how and if you are eligible to sign up for a HSA. You generally cannot have any other coverage other than a high-deductible health plan if you want to have a HSA. Click here for more information on eligibility. There are situations in which federal law will permit you to have additional coverage. To learn more about this coverage, visit IRS.gov, and your employer’s benefit information.
Advantages of a Health Savings Accounts
1. On average, you will pay lower premiums than with traditional health plan options.
2. You can get triple tax savings.*
- The money you put in is tax deductible, up to the legal limit. In 2011, the contribution limit for an individual is $3,050, and the limit for a family is $6,150. If you are age 55 or older, you can contribute an additional $1,000 each year.
- Your savings grow tax-free.
- Any money you take out to pay for eligible medical expenses is income-tax free.
3. The money in your HSA is always yours. All amounts in your HSA belong to you, and unspent balances in accounts remain in your account until spent.
*State tax treatment of HSAs varies. Go to your state’s department of revenue to find out more
4. Your account is portable, meaning your money stays put even if you:
- Change jobs
- Change medical coverage
- Become unemployed
- Move to another state
- Get married or divorced
5. With an HSA, you decide:
- How much you will contribute to your account
- When you want to use your savings to pay for or reimburse yourself for eligible medical expenses
- What bank will administer your account
- Whether or not to invest some of your savings in mutual funds for greater potential long-term growth
Depositing and Withdrawing Funds
When you fill out an application to open an HSA, you can usually arrange to make an initial deposit. You can do this by transferring money from another bank account, or you can send the bank a check or money order with a contribution/deposit form.
If your employer offers payroll deduction, you may elect to have an amount deducted pre-tax from your paycheck and deposited directly into your HSA. This contribution will be made before Social Security, federal and most state income taxes are deducted.
Some institutions will provide you with a debit card that you can use at a doctor’s office or pharmacy. You also have the option of paying out of pocket and then reimbursing yourself from your HSA later.
Qualified Medical Expenses
Once you set up a HSA with the financial institution of your choice, you can withdraw funds to pay for qualified eligible medical expenses from the account.
A “qualified” expense refers to most medical, pharmacy, dental and vision expenses, including but not limited to:
- Routine health care: Office visits, X-rays, lab work
- Hospital expenses: Room and board, surgery
- Medications: Prescription and over-the-counter (OTC) drugs, like aspirin (as of January 1, 2011, OTC medications can no longer be paid from HSAs unless prescribed by a physician)
- Dental care: Cleanings, fillings, crowns
- Vision care: Eye exams, glasses, contacts
- Co-pays and coinsurance: The portion of health-care bills paid by you
Additionally, you can use your HSA funds for alternative or preventive treatments not normally covered by health plans, including LASIK surgery, chiropractic services, tobacco-cessation programs and acupuncture.
Keep in mind, if you use your HSA funds for nonqualified medical expenses prior to age 65, you will have to pay income tax and a 20% penalty for the HSA distribution. After age 65, you can use the money in an HSA for any non-health care expenses without penalty, but it will be taxed as income.
A full list of qualified expenses is available at IRS.gov. The list is subject to change and is intended only as a general guideline for covered expenses. You should consult a tax, legal or financial advisor to discuss your personal situation.
If you have a qualifying HDHP, you are eligible to open an HSA if:
- You are not covered by any other non-HDHP health plan, such as a spouse's plan that provides any benefits covered by your HDHP plan. Exceptions include permissible coverage, such as specific injury insurance or accident, disability, dental, vision or long-term care insurance.
- You are not enrolled in Medicare.
- You are not enrolled in the TRICARE or TRICARE for Life military benefits program.
- You have not received Veterans Administration (VA) benefits within the past 3 months.
- You are not eligible to be claimed as a dependent on another person's tax return.
- You are not covered by a health-care flexible spending account (FSA) for the tax year in which you will claim your HSA deposits as tax deductions.