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Health Spending Account Rules

A Health Savings Account (HSA) or Medical Savings Account (MSA) is a financial savings tool that provides individuals another way to pay for health care costs. Set up like an Individual Retirement Account, an HSA allows employers and/or employees to contribute money to a tax-free fund dedicated for medical expenses. The fund is used in connection with a High Deductible Health Plans (HDHPs) to offset deductibles and out-of-pocket medical expenses associated with these health insurance plans. The benefit of HSAs is they provide several tax advantages to individuals adhering to their rules.

  1. Eligibility Rules

    • All individuals enrolled in an HDHP can contribute to an HSA, such as a self-employed individual, an employee or spouse of a small business and/or a small business owner.

    Health Insurance Portability and Accountability Act (HIPAA) Contribution Standards

    • The Health Insurance Portability and Accountability Act (HIPAA) put in place a series of standards to increase the effectiveness of the nation's health care system. It allows health insurance providers to make regular inflationary adjustments to the minimum and maximum deductibles and out-of-pocket costs associated with HDHPs. The adjustment schedule is also used to set minimum and maximum yearly allowable HSA contributions for employers and individuals. For example, a self-employed individual enrolled in an HDHP with an individual insurance plan must contribute a minimum of $1,300 and a maximum of $1,950 to their HSA for the 2010 calendar year. An employer and/or employee with a group insurance plan must invest a minimum of $3,037.50 and a maximum of $4,537.50 for the 2010 calendar year.

    Contribution Tax Rules

    • HSAs offer fund contributors (i.e., employers and employees) certain tax advantages, but only one of them is permitted to claim the tax benefit per calendar year. Employers can deduct their contributions to employees' HSAs as a business expense when the benefit is offered to all employees. The deduction lowers the employer's annual business tax liabilities. Employees can also subtract HSA contributions from their gross income for federal income tax purposes for the year in which contributions are made. Some states let employees deduct HSA contributions from their state income taxes.

    Distribution Rules

    • Individuals can withdraw money from their HSA to pay for qualified medical expenses--deductibles and out-of-pocket expenses determined by the HDHP provider, at any point as needed. An individual can request a fund distribution for a non-qualified medical expense as well. However, the distribution is subject to income tax and a 15 percent penalty when the individual is under 65. If the individual is over 65, the distribution is subject to income tax, but not the 15 percent penalty.

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