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How Does a Healthcare Savings Account Work?

Opening a health savings account can be a good way to put money aside for future medical expenses while saving money on taxes at the same time. If you qualify for an HSA, you may take an immediate tax deduction and you may use the money in your HSA to pay for health care expenses not covered by your insurance plan.

  1. High Deductible Health Plan

    • Before you may open a health savings account, you must first have a high-deductible health plan, known in the industry as an HDHP. To qualify as an HDHP, the plan must have a deductible of at least $1,200 for single coverage or $2,400 for family coverage. Your health insurance broker or human resources director can let you know if your plan qualifies as an HDHP.

    Open an HSA

    • If you qualify for an HSA, you may open one at many banks, brokerage firms and mutual fund companies. When you open the account, you will be required to make a deposit. The minimum to open an HSA varies by institution. For 2011, you may contribute up to $3,050 to an HSA that covers only yourself, or $6,150 for an HSA that covers your family as well. If you have money left in your HSA at the end of the year, the funds roll over to the next year, and you may use them any time you choose.

    Debit Card

    • When you open a health savings account, you should receive a special debit card from the plan administrator. This card looks like any other debit card and it even carries the VISA logo, but you may use the card only to pay for health care expenses. If you use the card to pay for general expenses, that money is considered taxable and you will have to pay income tax and a penalty on those withdrawals. You may, however, use your HSA debit card to pay for things like doctor visits, prescription drugs and eyeglasses. Starting in 2011, you may not use the HSA debit card to buy over-the-counter medications unless you first obtain a prescription from your doctor.

    Tax Deduction

    • If you open an HSA, you may receive a tax deduction based on the money you put into that account. You do not have to itemize your deductions to benefit from your HSA contribution, making it accessible to many more taxpayers. Each time you contribute money to your HSA, you should document that deposit carefully so you may report your contributions accurately when you file your taxes.

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