Guide to Health Savings Accounts (HSAs)

A Health Savings Account, commonly called an HSA, offers United States consumers another option for paying for their medical costs outside of a traditional health insurance policy. Account holders decide how to spend the money they accumulate in an HSA. They also decide how to invest the money in the account in an attempt to accumulate more funds to cover health-care expenses.

Types

• Some employers provide HSAs for their employees. However, people can set up their own accounts through other companies that offer HSAs, including banks, credit unions and insurance companies. An HSA essentially is a savings account in which you deposit money to cover health-care costs. The High Deductible Health Plan that's required to open an HSA is an inexpensive plan intended to cover any health-care expenses you have that exceed the funds available in your HSA.

Features

• Employees own the HSAs they open through their employers. Therefore, the accounts and all funds in them remain at employees' disposal, even if they change jobs. Unlike other medical savings accounts, HSA funds can accumulate for years because they don't have to be spent by a certain date. Still, the accounts are limited by maximum annual contributions. The 2010 contribution limit is $3,050 for one person and $6,150 per family. HSA owners may use their accumulated funds to pay medical costs for themselves, a spouse, their children or other dependents.

Benefits

• Healthy people and young people may save money with the high deductible plan needed to open an HSA. That segment of the population has fewer medical costs, and they will pay lower premiums for a health plan. People with serious medical conditions also may save money because high-deductible plans include a maximum amount in health-care costs that policyholders pay. Their payment obligations cease after that maximum is reached. Coverage varies widely, so plans should be carefully examined to determine potential savings.

Potential

• United States tax laws determine which HSA health-care costs can be reimbursed, and the allowable expenses are broader than what insurance companies usually offer. The Internal Revenue Service publishes a list of expenses that can be reimbursed, and they range from buying contact lenses and eyeglasses to getting acupuncture and chiropractic care. The IRS also cites HSA eligibility requirements. For example, people can't be enrolled in Medicare and have an HSA.

Expert Insight

• The New York Times columnist Ron Lieber notes in his article "Hefty Tax Break Spared in Health Care Bill" that money deposited into an HSA at a bank is not subject to federal income taxes. In addition, there's no tax on account earnings if the money in the HSA is used for qualified health-care expenses.