About Health Savings Accounts in Tennessee

A Health Savings Account is a specialized account that individuals can fund with tax-deductible dollars. The funds in this account can then be used to pay for such qualified medical expenses as visits to the doctor's office, emergency room care, medical exams and un-reimbursed hospital procedures. In order to have a Health Savings Account in Tennessee, the individual must have a high-deductible medical insurance policy in effect and not be covered by any other medical insurance plan.

Funding

• Health Savings Accounts are set up in conjunction with a high-deductible insurance policy, but the funds are deposited with a separate institution, typically a bank or other financial services company. Contributions to the Health Savings Account may be up to 100 percent of the amount of the deductible of the health insurance policy up to $2900 in 2009. The funds in the account are treated much like an Individual Retirement Account by the IRS and are not treated as ordinary income unless they are withdrawn to pay for non-qualified expenses.

Function

• Funds may be withdrawn from the account holder's Tennessee Health Savings Account without income tax repercussions for medical service fees to doctors, dentists, surgeons and other medical practitioners, prescription medications, hospitalization, psychiatric care, lab work and transportation expenses incurred to obtain medical care. Non-qualifying medical care includes such items as health club membership dues, weight loss programs, diaper services, funeral expenses, most over-the-counter and non-prescription medications and others.

Tax Benefits

• Contributions to a Tennessee Health Savings Account are considered to be pre-tax dollars, meaning these funds will not be subject to income tax in the year they are contributed. Any interest income generated by the funds in the account will accumulate free of income taxes as long as the funds are used to pay for qualified medical expenses.

Ownership

• All funds deposited into a Tennessee Health Savings Account become the property of the account holder. Funds that are not spent by year's end may be rolled over into the following year with no tax penalty. Any funds remaining in the account holder's Health Savings Account when he or she reaches age 65 may be used for purposes other than qualified medical expenses without incurring any tax penalties although these funds will be subject to ordinary income tax.

Warning

• The account holder may withdraw funds from his or her Tennessee Health Savings Account at any time and for any purpose. However, funds withdraw prior to reaching the age of 65 that are used for any non-qualifying purpose will incur both ordinary income tax and a tax penalty of 15 percent.