Health Savings Account Rules

HSA Contribution Limits, Uses and Tas Benefits 

A Health Savings Account or HSA is tax advantaged medical savings account that is owned by the individual.  They are designed to be used in conjunction with a High Deductible Health Insurance Plan.  The money contributed to the account are not subject to federal tax at the time of deposit (Pre-Tax Dollars).   

Health Savings Account Contribution Limits

Initially Health Savings Account contributions were limited to the lesser of the actual deductible or specified IRS limits.   Congress later eliminated the deductible based limit and set guidelines to limit maximum contributions.

These contribution limits are according to IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans". You can make HSA contributions for any calendar year until April 15 of the following calendar year, the same as IRA contributions.

This means in 2010 a family may contribute $6150 ( $512.50 /mo. ) to an HSA. If the owner of the plan is age 55 or older the catch up provision allows an additional $1000 for a total contribution of $7150.

Any money in your HSA account that is not used during a calendar year is rolled over to the following year, so this means your account balance can grow over time.

Health Savings Account Eligibility

In order to establish a Health Savings Account ( HSA ) you must have a High Deductible Health Plan ( HDHP ). You may choose the deductible and co-insurance combination you wish to have but they must fall within these guidelines for 2010:

For example:  If you are an individual with more than $5000 in your HSA you may choose a HDHP that has a $5000 deductible and no co-insurance. This plan would be inexpensive and would meet the HSA Eligibilty requirements. However, a plan with a $5,000 deductible and 20% co-insurance for a maximum out of pocket of $7000 would not qualify as it is above the Maximum Out Of Pocket limit of $5,950.

Health Savings Account Investments

Your HSA account has investment options similar to an IRA account. Money market or similar cash instruments are common as people want to make sure funds are available to cover out of pocket medical expenses. If your balance grows beyond your annual maximum out of pocket expenses, then you may choose to put the excess into a stock mutual fund or other "at risk" investment option. Your HSA administrator may charge extra fees to establish brokerage services. Please consult your account representative for advise and investment options.

Health Savings Account Qualified Expenses

You can use your health savings account to pay for a wide range of medical and health related services. When you incur a medical or health related expense that is not covered by your insurance, there is a good chance that you can pay for it out of your HSA.

 
The IRS defines qualified expenses as: "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract." Source: IRS.Gov

Examples of HSA Qualfied Expenses Include:

Doctor Visits and Tests not covered by your insurance policy.

Surgical procedures and hospitalization related charges not covered by your insurance.

Prescription Drugs and OTC Drugs but not vitamins or supplements.

Accupuncture & Chiropractic Care

Eye Exams, Glasses and Laser Surgery

Hearing Tests and Hearing Aids

Dental Exams, Dental Work and Dentures

Alcohol and Drug Abuse Treatment

Insulin and Diabetic Testing Supplies

Long Term Care related expenses.

Wheel Chairs, hand rails or other disability related home improvements.

Your health insurance provider or HSA administrator will provide you with a complete list of goods and services that are eligible. 

The complete list is also available on pages 5-14 on IRS Publication 502

Record Keeping:  Make sure you save all your HSA related receipts in case you are ever audited. Similar to a tax audit you will need proof of what you purchased using your account.

How To Open A Health Savings Account

The health insurance provider where you purchase your High Deductible Health Plan will provide you with a list of local institutions or you can choose any institution that sponsors HSA plans.   The fees do vary between institutions but are generally between $2.25 - $4.50 per month.  Several will waive the fees once your account balance reaches $2500, $3000 or $5000.  

Most HSA accounts come with a check book and debit card for paying for medical services.

You will want to choose an institution that not only has reasonable fees but also offers the investment options that suit your needs.

Here are a few examples of fees charged for HSA's by various institutions:

HSA Withdrawal Rules

It is not necessary for HSA participants obtain advance approval to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses.   Most HSA administrators make both checks and a debit card available for easy access to your money.  Some also allow a for a reimbursement process similiar to the one used by most health insurance companies however this is uncommon.

Funds can be withdrawn for any reason using checks and debit cards, however any withdrawls that are not used for qualified medical expenses are subject to a 10% penalty as well as income taxes.    The 10% penalty is waived for people age 65 and older or those who have become disabled.  Income taxes still apply in these situations but there is no additional penatlies.  These rules are very similar to the ones governing other tax sheltered accounts such as IRAs.

Any funds withdrawn for qualified medical expenses are always tax free.  You must however keep documentation pertaining to all qualifed medical purchases.  A lack of documentation can be grounds for the IRS to rule that funds were not used for qualified medical expenses and the account holder would be subject to additional penalties.

When an account holder dies, the funds transfer to the beneficiary designated on the account.  If a surviving spouse is the beneficiary, the funds will transfer on a tax free basis.

Health Savings Account Contribution Limits
Health Savings Account Eligibility
Health Savings Account Investments
Health Savings Account Qualified Expenses
How To Open A Health Savings Account
Health Savings Account Withdrawal Rules

Information Source: US Department Of The Treasury