Health Savings Accounts

HSA Links

HSA FAQ

HSA Basics

HSA Qualified Medical Expenses

Health Savings Accounts
HSA piggy bank

The HSA Basics

A Health Savings Account is a portable, tax-favored savings account combined with a qualifying high deductible health plan (HDHP) that allows you to fund health care expenses with pre-tax money. Your deposits to a Health Savings Account reduce your taxable income, and withdrawals are never taxed as long as funds are used to pay for qualified medical expenses.

Unlike Flexible Spending Accounts (FSAs), HSA contributions roll over from year to year (no "use it or lose it") and remain in place regardless of where you work or what insurance company you are insured by. The maximum funding limits and minimum deductible for HSAs are set by the IRS each year and are as follows:.

IRS HSA Guidelines

Min. HDHP Deductible	2008	2009
Individual	$1,100	$1,150
Family	$2,200	$2,300
Maximum Contribution	2008	2009
Individual	$2,900	$3,000
Family	$5,800	$5,950

HSA Qualified Medical Expenses

Even though you have received a tax deduction by putting your money into this account, the money is still yours to spend tax free, as long as you spend it on qualified medical expenses. Since you have a high-deductible plan, this would of course include any expenses you incur from going to the doctor, purchasing prescription drugs, or paying other expenses toward your deductible. Once your deductible is met, the health insurance covers your medical expenses as defined in the policy.

In addition to being able to withdraw your money tax free to cover these types of expenses (which might otherwise be covered by a traditional low-deductible high-premium policy), you can use your HSA account to cover other costs that would not normally be covered by a health insurance policy. Below is a table of the most common HSA qualified medical expenses:

Qualified HSA Medical Expenses

Acupuncture	Hearing aids	Post-nasal treatments
Alcoholism treatment	Laboratory fees	Prenatal care
Ambulance	Lasik surgery	Prescriptions
Artificial limb	Learning disability fees (prescription)	Prosthesis
Artificial teeth	Life-care fees	PSA test
Bandages	Lodging (for out-patient treatment)	Psychiatric care
Birth control pills (prescription)	Long-term care (medical expenses)	Psychiatrist
Breast reconstruction	Long-term care insurance	Psychoanalysis
Car special hand controls (for disability)	Meals (while receiving treatment)	Psychoanalyst
Chiropractors	Medical conferences (for ill spouse/dependent	Psychologist
Christian Science practitioners	Medicare deductibles	Radium treatment
COBRA premiums	Nursing care	Smoking cessation programs
Contact lenses	Obsetrician	Special education for children
Cosmetic surgery (from trauma or disease)	Operating Room Costs	Spinal tests
Crutches	Organ transplant	Splints
Dental treatment	Orthodonture	Sterilization
Dermatologist	Orthopedic shoes	Telephone & TV for hearing impaired
Diagnostic devices	Orthopedist	Transportation expenses for treatment
Disabled dependent care	Out-of-pocket expenses (Medicare)	Vaccines
Drug addiction treatment (inpatient)	Over-the-counter medicine	Vitamins (if prescribed)
Eyeglasses	Oxygen and equipment	Wheelchair
Fertility enhancement	Pediatrician	Weight loss programs
Guide dog	Personal care services (for ill)	Wig (hair loss from disease)
Gynecologist Deductible	Podiatrist	X-rays
Health institute (if prescribed)	Post-nasal treatments

How HSA Savings Work

HSAs allow you to legally avoid federal income tax by saving up to $2,900 for singles or $5,800 for families, into your HSA account*. There is no minimum deposit (it can be $0 if you want), but whatever you deposit into your account by April 15th is an "above the line" tax deduction for the previous year's income taxes. This means that you get a federal income tax deduction for money you put in even if you take the standard deduction and don’t itemize deductions. Even though you have received a tax deduction by putting your money into this account, the money is still yours to spend tax free, as long as you spend it on qualified medical expenses.

Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical plan that has a $500 deductible. And there is no other investment that offers a tax deduction today along with a tax-deductible withdrawal tomorrow. The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year.

Below is an example comparing how much a typical PPO plan with a $500 deductible and 80% coinsurance might cost, compared to a typical HSA plan with a $2200 family deductible and 100% coinsurance. This example is based on the average health insurance premium of an individual with a family of four living in Chicago, with $1700 in medical expenses and $450 in expenses for dental care, contacts and eyeglasses. This illustrates the difference in plan costs if the plan holder is in a 28% federal tax bracket, pays the 3% Illinois state income tax, and deposits $5,800, the maximum 2008 contribution allowed, into his HSA.

HSA vs PPO Savings

Average PPO Plan Average HSA Plan

Premium paid (annual) - $12,100 - $7,100

Your share of medical expenses - $740
$500 deductible
$240 coinsurance - $1,700

Non-covered expenses - $450 - $450
dental and eye wear expenses

Pre-tax expenses = - $13,290 = - $9,250

Federal tax savings + $0 + $1,624
($5800 x .28)

State tax savings + $0 + $174
($5800 x .03)

Net expenses $13,290 $7,452

Total net savings n/a $5,838

How to set up an HSA

You can open a health savings account at any bank or credit union. Most insurance companies offer HSAs through a specific bank they have partnered with, but these banks often charge high service fees. We recommend using First American Bank because they have do not charge a setup or monthly service fee and provide a free debit card.

HSA Eligibility

To be eligible for a Health Savings Account, an individual must be covered by a HSA-qualified High Deductible Health Plan (HDHP) and must not be covered by other health insurance that is not an HDHP. The Qualified High-Deductible Health Plan must be be in place before an HSA account can be opened.

Dependents (any individual claimed on another person's tax return) or individuals eligible for Medicare cannot open an HSA. Persons age 65 and over can maintain an HSA established prior to age 65, but they can no longer make contributions into the HSA.

HSA Contributions

For 2008, the maximum you may contribute to a Health Savings Account (HSA) is $2900 for single coverage or $5800 for family coverage. There is no minimum contribution amount required by the IRS, but your HSA administrator might require a minimum initial payment.

Catch-Up Contributions

The designers of HSA legislation were concerned these plans would favor younger people with more years to set aside savings. So a "catch up" provision was included. For 2008, HSA holders age 55 and older may make additional annual contributions of $900, increasing by $100 each year to a maximum additional calendar year contribution of $1000 in 2009.

Employer Contributions

An employer may contribute to an employee's Health Savings Account (HSA), but the employer must make available comparable contributions on behalf of all "comparable participating employees." Contributions are considered comparable if they are the same amount or same percentage of the HSA-compatible high deductible health plan. Employer contributions to HSAs are deductible Health and Welfare expenses and generate no taxable income to employees as long as the discrimination guidelines are not violated.

Contribution Frequency & Deadlines

How often you contribute to your HSA is up to you. You can make a lump sum contribution for the year, monthly deposits, or random contributions through out the year. HSA contributions must be made before the April 15th tax deadline to be included in that year's income tax statement. So, for 2010, contributions must be made on or before the April 2009 filing deadline. Employer contributions to HSAs are deductible Health and Welfare expenses and generate no taxable income to employees as long as the discrimination guidelines are not violated.

Rollovers & Transfers

Rollover contributions from Archer MSAs and other HSAs are permitted, and are not subject to the annual contribution limits. Employers can also transfer funds from a Health Reimbursement Arrangement (HRA) or Flexible Spending Account (FSA) to an HSA for employees switching to coverage under an HSA-compatible plan. These rollover amounts are not subject to the annual contribution limits.

You can make a one-time contribution to an HSA of amounts distributed from an Individual Retirement Account (IRA). Generally, the IRA transfer is limited to once per lifetime, and the contribution must be made in a direct trustee-to-trustee transfer.

HSA Distributions

Any distribution used to pay for a qualified medical expense from a Health Savings Account are excluded from your taxable gross income. Any distribution from an HSA not used for a qualified medical expense are included in gross income and subject to an additional 10% tax unless individual is over 65. The bank holding your HSA funds has absolutely no involvement in matters of determining eligible expenses and qualified distributions. It is the account holder's responsibility to determine what medical expenses are eligible to be funded by the HSA. In case the IRS ever wants to review your use of HSA funds, you should keep records of your health care expenses.

HSA Distributions after Death

If the Health Savings Account (HSA) owner dies, the HSA becomes the property of the named beneficiary. If the spouse is the beneficiary, the HSA can continue and the surviving spouse is subject to income tax only on HSA distributions not used for qualified medical expenses. If the HSA passes to a person other than the spouse, the HSA terminates as of the date of death, and the beneficiary is required to include the HSA assets in gross income. The taxable amount is reduced by any HSA payments for the decedent's qualified medical expenses, if paid within one year after death.