HSA Annual Limits

People with an HSA, or a Health Savings Account, can sock away money for medical expenses on a tax-preferred basis. To be eligible for an HSA, workers must be enrolled in a high deductible insurance plan. IRS regulations limit the amount of money you can put into an HSA in any given year. For people with insurance plans that cover only a single person, the contribution limit is $3,050 in 2010 and 2011. It is $6,150 for people with family coverage.

History

• Health insurance costs have risen fast between 1999 and 2010, according to data from the National Conference of State Legislatures. Policy makers believe that one factor contributing to the rise in health insurance and health care costs is the nature of traditional health insurance. With traditional health insurance, it costs little or nothing to go to the doctor. As a result, people use health care early and often. Policymakers believe that if people were forced to pay more from their own pocket, they would use less health care and, therefore, drive the cost down. High deductible insurance plans, which can feature out of pocket costs that exceed $11,000 for families, are less expensive than traditional insurance. Such policies cost an average of $11,000 per year in 2010, compared with $13,000 for traditional insurance.

The Basics

• Meeting a high deductible can be disastrous for many families. A good used car can cost $11,000. Just think about how long it takes to pay that off. Enter the HSA. With a health savings account, people can save money to be used for future medical expenses. Funds are placed in the account -- either from employers or employees -- before taxes are deducted from wages. Policy makers hope that employees can save enough money in years they are healthy to offset years when they face high medical costs.

Signficance

• A big criticism of HSAs is that they primarily benefit the wealthy. The National Center of Policy Analysis, notes that the tax benefits are greater for higher income individuals. "Someone in the 15 percent federal tax bracket gets less of a tax subsidy than someone in the 35 percent bracket. But this is true of all deductions in the tax code -- from home mortgages to interest payments," the center notes. This is one of the reasons HSA contributions are limited. Unlimited contributions could create tax shelters for wealthy people who use little of their income on living expenses and are looking for ways to keep the money they save.

Special Rules

• If two spouses have separate high deductible plans and one is a family plan, their combined limit for HSA contributions for the 2009 tax year remained $5,950. If an employer contributes to your HSA, you must reduce your contribution limit by the amount your employer contributed. For example, if your employer contributes $1,000 and you have family coverage, you can contribute $5,150 in 2010. People who are 55 and older with single person coverage were able to contribute an additional $1,000 to an HSA during the 2009 tax year.

Considerations

• HSA and high deductible plans may not be for everybody. Young people with low medical costs may find these plans attractive because they are portable and they offer the chance to save a large amount of money. Persons with chronic conditions, who take regular medication or who are planning families may not benefit financially from these plans, and may be better off with traditional insurance, especially because the contribution limits may prevent them from building a large balance in the HSA.