Health Care

Health Savings Account Answers

This fact sheet explains the ins and outs of opening, funding and benefiting from health savings accounts.

By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance

June 2010

Questions about health savings accounts have poured in since the tax-free savings vehicle was introduced as part of Medicare. Find our answers below.

SEE ALSO: Save for Medical Costs With an HSA

Who can get an HSA?

Anyone who buys a qualified high-deductible health insurance policy can contribute to an HSA, although you cannot make new contributions to an HSA after you sign up for Medicare.

How much can I contribute annually to an HSA?

In 2010, you can contribute up to $3,050 to an HSA if you have self-only coverage or up to $6,150 for family coverage. If you're 55 or older, you can contribute an extra $1,000 in 2010.

Can any high-deductible health insurance policy qualify for an HSA?

Any high-deductible health insurance policy can qualify, as long as it meets the IRS requirements. In 2010, the deductible must be at least $1,200 for individuals or $2,400 for families, and the annual out-of-pocket expenses cannot exceed $5,950 for self-only coverage or $11,900 for family coverage, including the deductible and co-payments (but not premiums). Individuals can buy high-deductible policies on their own or through their employers.

How and where can I open a health savings account?

It depends on if you're buying coverage on your own or getting it through your employer.

On your own. You can find HSA-eligible policies from several insurers in most states at eHealthInsurance.com, or can search for a local agent who knows which policies are available in your area at the National Association of Health Underwriters Web site.

Through your employer. If you get health insurance through your employer, you may have seen an HSA-eligible option during last-year's open-enrollment period (generally in the fall). If not, talk to your benefits manager to see if HSAs will be on your health insurance menu. Choosing an HSA could knock down your share of premiums significantly, and some employers may choose to fund all or part of the HSA for you -- perhaps even adding a 401(k)-style match.

Would I fund an HSA with pre- or post-tax dollars?

If your employer offers a high-deductible health insurance policy, you may be able to make pretax contributions, like you would with a flexible-spending account. If you open the HSA on your own, your contributions will be deductible when you file your taxes, even if you don't itemize.

You can now deduct your contributions up to the $3,050/$6,150 limit -- plus an extra $1,000 if 55 or older -- regardless of the size of the deductible.

Do the tax benefits phase out at certain income levels?

Unlike many other tax breaks, there aren't any income limits. Anyone who buys a qualified high-deductible policy can open an HSA, as long as they have not yet signed up for Medicare.

What's the difference between HSAs and the flexible-spending accounts? It seems they are for the same purpose.

The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred.

Money in your flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible-spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy.

If my employer offers both, can I fund my flexible spending plan, too?

No. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage (say, through a spouse's policy). However, if your flex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA, too.

If I set up HSA through my employer, what happens if I switch jobs?

You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% (20% beginning in 2011) penalty -- plus an income-tax bill -- if you use any of the money for nonmedical expenses before age 65.

What happens if I want to withdraw the money for nonmedical expenses after age 65?

You won't be hit with the 10% (20% beginning in 2011) penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.

Can a couple who is planning to retire early open an HSA?

Sure. Anyone who has not signed up for Medicare can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $1,000 in 2010 if you're 55 or older.

You can't make new HSA contributions after you start receiving Medicare, but you can still use the money in your account tax-free for medical expenses at any age. You'll owe income taxes on the money -- but no penalty -- if you withdraw the money for nonmedical expenses after age 65.

Do contributions to an HSA in any way affect one's ability to contribute to an individual retirement account?

No. Your HSA contributions won't affect your IRA limits. It's just another tax-deferred way to save for retirement.

Editor's note: This story has been updated since it originally was published in 2004.

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