HSA Account Guidelines

Health Spending Accounts or HSAs are savings accounts for health care expenses. The HSA account is used to cover medical expenses which are typically not covered by regular health insurance. The special features of the account include tax advantages, interest accrual and portability. Used in conjunction with health insurance, the HSA account offers added protection against current and future health issues.

Features

• HSA accounts help individuals save for future expenses.

  A Health Savings Account is essentially a savings account. What makes this account different from a regular account is the fact that the funds can only be used for medical expenses. Contributions to the account are nontaxable. Set up by the Internal Revenue Service, the account features a tax deduction on annual returns. Medical expenses paid from the fund are also nontaxable. Money contributed to the account rolls over from year to year and funds do not have to be used in any given year. The account generates interest which is also tax free.

IRS Guidelines

• Contributions to an HSA account are tax deductible.

  The IRS governs who can open an HSA account. Only individuals under the age of 65 and not covered by Medicare can open an account. Individuals cannot be dependents of another person when opening the account. An applicant must also be covered by an HSA-qualified High Deductible Health Plan (HDHP) and cannot be covered by any additional non-HDHP programs. An HDHP, or catastrophic health plan, is a plan that has a high deductible -- usually $1,000 or more. There are yearly contribution limits for the accounts. The limits for 2011 are $3,050 for single filing and $6,150 for family coverage. HSA account holders over the age of 55 may contribute an additional $1,000 yearly. Contributions over the stated amounts can result in a 6 percent tax penalty.

Opening an Account

• Many companies offer HSA accounts during open enrollment. The benefits counselor works with the employee to determine if they are eligible for participation. Banks and credit unions offer health spending accounts in service offerings as well. Interested applicants can also contact insurance companies regarding signing up for HSA accounts. It is not a product that is purchased but an account that money is deposited into.

Eligible Expenses

• Prescription drugs are covered by an HSA.

  HSA eligible expenses include doctor visits, prescription drugs, lab tests, diabetic supplies, specialist visits and hospital visits. Nonmajor expenses are also covered such as dental, vision, eyeglasses, smoking cessation programs and acupuncture. Starting in 2011, over-the-counter drugs such as cough medicines and pain relievers are no longer considered eligible expenses. If the funds are used for noneligible expenses there is a 10 percent excise tax and the expense is taxed as normal income on the tax return.

Benefits

• Opening a Health Savings Account allows money to be saved for future health expenses, tax free. The account also enables the individual to have more choice and control over how health care funds are used. One of the biggest benefits is the fact that all of the dollars saved are tax free. Some banks allow the investment of HSA dollars into stocks, bonds and mutual funds which have even bigger returns. The portability of the account means that it is not affected by job changes, loss of employment or relocation.

After 65

• Health Spending Accounts can be investment vehicles for retirement. After an individual reaches 65, they are no longer subject to an excise tax for nonmedical expenditures, when using HSA funds. The funds still need to be reported on the tax return as income, however. Medical expenses are still tax free after age 65. HSA dollars saved can cover the individual's expenses, as well as those of a spouse and dependents.