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What is a Health Savings Account (HSA)?

Medical expenses are a major concern for many of us today. With the rising cost of healthcare coverage, more and more employers are cutting costs by providing insurance plans with high deductibles or eliminating healthcare coverage altogether. Whether you are covered by your employer or you choose to purchase your own coverage, a high-deductible health plan will have you paying large out-of-pocket expenses in order to maintain a low premium.

These plans require you to pay for medical expenses until the deductible is reached, which could cost you thousands of dollars. However, there is a smart saving option to help you pay for these expenses, and save money at the same time: a Health Savings Account (HSA).

Using your HSA to pay for qualified medical expenses is easy. You are allowed an unlimited number of tax-free payments or withdrawals to pay for qualified, out-of-pocket medical expenses as they occur. Oftentimes the bank will give you a debit card for you to use on all your health related spending.

As the owner of your account, you are responsible to report HSA activity by completing and filing Form 8889 with your federal tax return. As a result, you must hold on to your qualified health care expense receipts to ensure accurate tax filings.

You may not always use every dollar you contribute to your HSA. So, you may wonder, what happens to that left-over money?

An HSA is not a “use it or lose it” account. Any unsed funds that are contributed to your account stay in your account. They don’t expire and disappear like a Flexible Spending Account (FSA). Unused funds rollover into the next calendar year and can accumulate in this way year after year. And, you can continue to make your maximum annual contribution regardless of the dollar amount that has rolled over or accumulated.

After age 65, unused funds can be used for any purpose – not just qualified health care expenses.

As a Health Savings accountholder, you must:

  • Be an individual or employee who is covered by a high-deductible health plan (defined as a plan with a deductible of $1,200 or higher for an individual or $2,400 or higher for a family)
  • Not be enrolled in Medicare
  • Not be a dependent on someone else’s tax return
  • Have no other first-dollar medical coverage – other types of insurance, such as specific injury insurance or accident, disability, dental care, vision care or long-term care insurance, are permitted

In addition, annual out-of-pocket expenses under the plan (including deductibles, co-pays, and co-insurance) cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.

If you meet the eligibility requirements, whether self-employed or even unemployed, anyone can contribute to an HSA on your behalf, including you, your employer or family members. Contribution limits are determined based on whether an individual or family is covered. For 2010, maximum HSA deposit contributions are:

  • $3,050 for an individual; and
  • $6,150 for a family.

For individuals 55 or older, there is a “catch-up” provision that allows you to contribute an additional $1,000 for 2009 and subsequent years. The “catch-up” contributions are prorated based on the number of months you are eligible. Any and all of your contributions must be made by April 15th of the following calendar year.

Contributions can be made at any time during a taxable year, up to and including the date for filing your federal income tax return. You can also take a one-time, tax-free distribution from your IRA and transfer it to the HSA. For more information on health savings accounts, you can visit the United States Treasury website. To learn more about qualified expenses, visit the Internal Revenue Service’s website.

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