27 October 2009
A Health Savings Account (HSA) is a savings account used to pay for out-of-pocket medical expenses. Contributions to your HSA are either tax-deductible (similar to deductible IRA contributions) or a pre-tax deduction if the HSA is offered through an employer's benefit plan (similar to 401(k) contributions).

Earnings in the account are not taxed, and distributions from the account that are used to pay for qualified medical expenses are tax-free.

To be eligible to contribute to an HSA, you must have a high-deductible health plan, or HDHP. The HDHP:
  • Must have a high deductible; for 2009 the minimum deductibles are $1,150 for self-only HDHP coverage and $2,300 for family coverage.
  • Must not pay medical benefits until the deductible is satisfied. For example, a medical plan that pays for prescription drugs or office visits without regard to the deductible is not a qualifying HDHP.

There are, however, exceptions for preventative or "wellness" benefits, such as basic health check-ups, maintenance drugs, cancer screenings, etc.

Other eligibility requirements:

  • You must not be a dependent on another person's income tax return, you may not have any other type of health insurance coverage, and you may not be enrolled in Medicare. Certain "permitted coverage" is allowed, including dental, vision and long-term care insurance. There is no earned income requirement.

If you meet all of the requirements, you may contribute up to $3,000 ($5,950 if you have family HDHP coverage) to your HSA. If you are at least age 55, you may contribute an additional $1,000.

You may use your HSA funds tax-free to pay for out-of-pocket medical expenses including doctor's visits, prescriptions and over-the-counter medicines, laboratory tests and hospital stays. But if you use HSA funds for some other purpose, the distribution is subject to tax at ordinary rates and, if you are younger than 65, a 10% penalty.

The HSA/HDHP combination is not for everybody because of the high deductible. If you are taking several prescription medications or if you expect to visit the doctor several times, you would have to pay a great deal out-of-pocket until your HDHP deductible is met. Or, you may not have enough to be able to fund an HSA.

But if your medical expenses are relatively low and you are able to contribute consistently to an HSA, consider all of these advantages in addition to the tax advantages:
  • HSA funds are not "use or lose," unlike flexible spending accounts (FSAs). You may keep the funds in the account as long as you wish and use them only when you need to.
  • Unlike Roth IRAs, there is no waiting period before you can begin taking tax-free distributions.
  • You may be eligible for a 1-time rollover of IRA or unused FSA funds to help fund your HSA.
  • HDHP premiums are often considerably lower than traditional health plan premiums. The lower premiums can mean you have additional funds to handle the HDHP deductible and fund the HSA.
  • Employers may fund some or all of the HSA for you. Employer contributions are tax-exempt.

HSA Questions

I don't have health insurance, can I get an HSA?

You cannot establish and contribute to an HSA unless you have coverage under a HDHP.

My employer offers an FSA, can I have both an FSA and an HSA?

You can have both types, but only under certain circumstances. General FSA's will probably make you ineligible for an HSA. If your employer offers a "limited purpose" (limited to dental, vision or preventative care) or "post deductible" (pay for medical expenses after the deductible is met) FSA, then you can still be eligible for an HSA.

I don't have a job, can I have an HSA?

There are no income limits that affect HSA eligibility. However, if you do not file a Federal income tax return, you may not receive all the benefits HSA's offer.

Can I start an HSA for my child?

No, you cannot establish separate accounts for your dependent children, including children who can legally be claimed as a dependent on your tax return.
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Topic: Credits and Deductions