How to Set up an HSA Plan

A Health Savings Account (HSA) is a savings account for medical purposes similar to an IRA. The idea behind HSAs, established in 2004 as part of the Medicare Prescription Drug Act, is that account holders pay less for premiums and put the difference in a tax-advantaged account that they control. Account holders deposit pretax earnings into the HSA, then make withdrawals that also may be tax-free if the funds are used for sanctioned medical expenses.

Instructions

Obtain an HDHP Policy and HSA Plan

• 1

  Enroll in an High-Deductible Health Plan (HDHP). This is a requirement for opening an HSA. The 2010 minimum deductibles for a policy to be considered an HDHP, set by the IRS, are $1,200 for self only and $2,400 for a family. Because of the higher deductible, the plan should be inexpensive and may pay for some preventive care without meeting the deductible. The 2010 maximum for out-of-pocket expense is $5,950 for self-only coverage and $11,900 for family coverage. If your medical expenses for the year exceed these figures, HDHPs often pay 100 percent from that point without asking for co-pays.

• 2

  Find a bank, credit union, insurance company or other financial institution that offers HSA plans. You will be in charge of the funds in your account and must decide what investments to make. You can withdraw money to cover medical expenses without securing the approval of a health insurer. Opening an HSA is free, but depending on the type of account you choose, HSA trustees may charge service fees. The 2010 limit for HSA contributions for an individual with self-only coverage is $3,050. For an employee with family coverage, the 2010 limit is $6,150.

• 3

  Contribute to the HSA without regard to interest that accrues. Interest income added to the account does not count against the yearly contribution maximum. Funds not withdrawn by the end of a year will carry over to the next year. If you terminate the HDHP policy, you cannot make further contributions, but the funds already in your HSA are still available for your use.

• 4

  Withdraw HSA funds only for medical expenses accepted by your plan. Qualified medical expenses include treatments, office visits, prescriptions and other expenses not generally covered by health plans, such as dental, vision and chiropractic care and over-the-counter medications. If you withdraw funds for anything besides the medical reasons outlined in the plan, you will have to pay income tax on the withdrawal as well as a 10 percent penalty. The only exceptions are you have reached the age of 65 or have become disabled. In those cases, funds may be taken out for any reason without penalty.