Rules & Regulations for a Health Savings Account

Health Savings Accounts allow you, if you are eligible, to contribute pretax income toward payment of you and your family's present and future medical expenses. Withdrawal of the money to pay these expenses must meet certain criteria, and the expenses are reported on your tax forms. An additional condition for the use of HSAs is that you and your family be covered by a health insurance plan that is a high deductible health plan, or HDHP.

Eligibility

• Eligibility for a HSA is limited to individuals, although a HSA can cover family medical expenses. Spouses, to be eligible for a HSA, must meet the eligibility criteria themselves. People such as children, who are claimed as dependents on income tax returns are not eligible to establish HSAs.

  In addition to being covered by a qualifying high-deductible health insurance plan, eligibility requires not having coverage from a non-qualifying plan, such as Medicare, or health reimbursement or flexible spending arrangements. However, there are some permitted combinations of HSAs with the other arrangements. These are situations where the allowed use of the arrangements is restricted or reimbursements are made after the HDHP deductible has been met or when coverage has been suspended. The minimum deductible in 2010 for a qualifying HDHP is $1,200 for an individual and $2,400 for a family.

Accounts

• When you set up an HSA account you are the owner of the account. This means you can decide what to contribute, what medical expenses are to be paid, which company is the trustee, and how it is invested for you. The trustee can set a minimum size for your distributions and restrict the frequency of distributions. The trustee can charge fees that are paid by you directly or taken out of your account. The balance in your account is fully vested so you never lose what you do not use.

Contributions

• The eligibility to make contributions to a HSA is not limited by the amount of your income or by a lack of earned income. You or your employer can make contributions. Contributions by your employer are not included in your taxable income. Your contributions are directly deductible from your taxable income. In 2010, the maximum contribution that can be made to your account is $3,050 for an individual and $6,150 for a family. If you are 55 or older, you can make an additional contribution of $1,000 per year up until you are eligible for Medicare.

Distributions

• Once the HSA is established, distributions for qualified medical expenses that you or your family incur after that date, including those for over-the-counter drugs, can take place. Distributions can be used for prior-year expenditures once the HSA is established. If you use the distribution for medical expenses not covered by the HSA rules and regulations, you will be taxed for the amount plus 10 percent more, unless you are dead, disabled or 65 years old. Disallowed distributions include those for non-qualifying health insurance; however, there are exceptions to this rule for COBRA continuation of insurance coverage and for other circumstances.

Reporting

• You need to keep receipts for all your qualified medical expenditures. You need to be able to prove to the IRS that what you are claiming on your tax forms are legitimate medical expenses and that you did not receive any other reimbursement for them or claim them as an itemized deduction. You may also need receipts to show your insurance company all of your expenses that apply to meeting your deductible. The maximum you can claim for out-of-pocket expenses in 2010 is $5,950 for an individual and $11,900 for a family. You receive a report of all annual distributions from the trustee to use when you file your tax return.