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HSA Explained

A health savings account, also called an HSA, is a tax-exempt account that you set up to pay for medical expenses. It works like a personal savings account, but you can only use the money you put in it for health-related expenses. You own the HSA, not your employer, insurance company or the government.

  1. Eligibility

    • You must be eligible to open an HSA by meeting certain requirements. You must have coverage under a high-deductible health plan. A high-deductible health plan has a higher annual deductible than typical health plans. You can't have other health coverage. You cannot be enrolled in Medicare, and you cannot be a dependent on someone else's tax form, according to the Internal Revenue Service.

    Theory

    • Established in 2003, HSAs became part of a consumer-driven health care drive. The theory behind HSAs is that they are supposed to control health care costs because when people are in charge of their health care dollars, they spend them more wisely. In addition, if doctors have to compete for your business, they have an incentive to lower their rates, according to MayoClinic.com.

    Right Plan For You

    • When deciding if an HSA is right for you, consider your health care needs, financial situation and how much control you want to have over your health insurance. For people who are relatively healthy and can afford a high deductible, an HSA could be a good choice. If you expect to need extensive medical care and cannot afford a high deductible, an HSA is probably not your best option. The benefit is lower premiums due to the higher deductible.

    Contribution Limits

    • As of 2010, your HSA deductible is $1,200 as an individual or $2,400 for a family. The Internal Revenue Service limits how much you can contribute each year to your HSA. For 2010, you can contribute up to $3,050 as an individual or $6,150 for a family. If you contribute more than that, you must pay a 6 percent tax on the excess. Each year you have an excess in your account, you are taxed the 6 percent excise tax. You can roll over any funds you do not use in your HSA to the next year. Rollovers are not subject to the annual contribution limits, meaning that the rollover contribution does not reduce your contribution limit. But, you can only make one rollover contribution each year.

    Keep Records

    • Be sure to keep good records for tax purposes if you have an HSA. You may have to prove that you actually used the money for medical expenses. If you are challenged and do not have records to prove that you used your HSA funds for medical expenses, the IRS can tax you 10 percent on your distributions to your HSA.

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