Health Spending Accounts

What is a Health Savings Account (HSA)?

Health Savings Accounts (HSAs) assist consumers in saving for medical expenses. In addition to providing tax benefits, HSAs offer an affordable solution to paying for both existing medical expenses and qualified future health care costs.

Because HSAs cannot replace traditional health insurance, to take advantage of the benefits of an HSA, consumers must be enrolled in a High Deductable Health Plan (HDHP). Because the HDHP deductibles are generally higher than traditional insurance, and most out-of-pocket expenses are not covered, HDHP premiums typically cost less than traditional health insurance. Ideally, the money saved from premium costs can be saved in an HSA.

What are the benefits of HSAs?

• Accounts can “roll over” from one year to the next year and accumulate tax-free savings.
• HSAs are assets that can be inherited.
• Interest and dividends are tax-free until retirement.
• Payouts for qualified medical expenses are tax-free.
• The pre-tax dollar contributions, and can be made by an individual, employer, or third party.
• They are portable benefits that are owned and controlled by individuals/employees.

Who can get an HSA?

Any individual covered by an HSA qualified High Deductible Health Plan and who is not covered by any other health insurance plan qualifies for an HSA. However, individuals are allowed to carry vision, dental, disability, automobile, and long-term care insurance along with an HDHP. In some cases, coverage for a specific disease or illness is also permitted.

What are the HSA contribution and deduction limits?

Contributions & Deductibles in 2010:

• HSA annual contribution limits Single—$3,050 Family—$6,150
• HSA catch-up contributions $1,000 per individual over age 55
• Minimum deductible amounts Single—$1,200 Family—$2,400
• Maximum out-of-pocket costs Single—$5,950 Family—$11,900

What is an HSA qualified expense?

Individuals control their HSAs and make all the decisions about how and where to spend the money as long as it is spent on qualifying expenses for the owner, his/her spouse, or anyone who is claimed as a dependent on the owner’s personal income tax. Dependents and spouses do not necessarily have to be covered by the HDHP to use the HSA savings for qualified expenses. It is important to note that money spent on items that are not qualified expenses will be subject to a 10% penalty tax, in addition to, both state and federal income taxes. It is also important to keep all receipts for purchases from your HSA.

The following is a partial list of qualified expenses (See IRS Publication 502 for a complete listing of qualified expenses):

• Acupuncture
• Alcoholism or drug addiction treatment
• Artificial limbs and prosthetics
• Braille books and magazines
• Chiropractic care
• Christian Science practitioners
• Costs that may be incurred when seeking treatment
• Crutches and wheelchairs
• Dental and Optical care, including dentures, prescription eyeglasses, contact lenses, eye surgery
• Emergency care
• Fertility enhancement
• Guide dogs and other helper animals
• Hearing aids
• Legal fees related to treatments
• Long-term care (medical expenses and insurance up to allowable limits)
• Meals and lodging associated with medical trips
• Medical conferences related to a qualifying condition
• Medical doctors
• Medical equipment, appliances and other personal item
• Medicare Part A or Part B and Medicare HMO insurance premiums
• Nursing services
• Physical therapy
• Prescribed weight-loss or stop-smoking programs
• Psychoanalysis
• Qualifying treatment-related expenses
• Self-pay for COBRA healthcare continuation when you leave a job
• Special schools and homes for the mentally disabled
• Telephone or television modifications for disability
• Trips and travel exclusively for the purpose of a treatment

What expenses do not qualify?

If you pay for expenses that do not qualify according to IRS Publication 502, you will have until April 14th of the following tax year to either reimburse your HSA account, or pay both federal and state income tax plus a 10% penalty on the amount withdrawn.

The following is a partial list of unqualified expenses (See IRS Publication 502 for a more comprehensive list):

• Cosmetic surgery (unless the surgery is related to a medical condition)
• Electrolysis for hair removal
• Food supplements and vitamins not prescribed by a doctor
• Funeral expenses
• Hair transplants
• Health club dues or swimming lessons
• Marijuana for glaucoma (or other controlled substances)
• Maternity clothes
• Nonnprescription drugs and medicines
• Teeth whitening
• Weight-loss programs not prescribed

How can a person get an HSA?

Most banks, credit unions, and health insurance companies offer HSAs. Also, many employers offer plans to their employees. To maximize your savings, research companies to find the best plan with the lowest administrative costs.

Other Resources:

U.S. Treasury: HSA Frequently Asked Questions
IRS HSA 2010 Contribution Limits and Deductibles (PDF)
IRS Publication 502: Eligible Expenses
U.S. Treasury: All About HSA's (PDF)

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