According to the IRS, a health savings account, or HSA, is a tax-exempt trust that the holder of the account may use to pay certain medical expenses. If you are eligible to open an HSA, you will not need permission from the IRS or any other governmental agency, but you will need to find an IRS-approved trustee to hold the account, such as a bank or an insurance company.
History
HSAs were first available after President George W. Bush signed the Medicare Prescription Drug Improvement and Modernization Act in 2003. The HSA was designed after the Archer Medical Savings Account. Shortly after HSAs were available in 2004, about 438,000 people were covered by HSA-type insurance plans. That number has grown to more than 3.2 million and is expected to swell to more than 14 million in the future.
Eligibility
To decrease tax liability by using an HSA for medical expenses, you must meet certain criteria. The most important criterion is being covered under a high deductible health plan, or HDHP. Next, you may not carry additional coverage, but there are exceptions for some additional insurance, including liability insurance, insurance for a specific disease or illness, accidents, dental, vision and long-term care. Additionally, you may not be enrolled in Medicare or be claimed as a dependent on another person's tax return.
High Deductible Health Plan
An HDHP, according to the IRS, is a health insurance plan with a high deductible relative to other insurance plans. Also, there must be a maximum limit on the sum of the annual deductible and any other out-of-pocket expenses, of which your insurance plan does not cover. For 2010, the deductible must be $1,200 for an individual insurance plan or $2,400 for a family insurance plan. The maximum amount spent on the deductible and out-of-pocket expenses for 2010 is $5,950 for individual insurance coverage or $11,900 for family insurance coverage.
Contributions
Where contributions to the HSA may come from depends on if the HSA is for an employee or set up by an individual. If the HSA is held by an employee, the employee, employer or both may contribute to the HSA. If the HSA is held by an individual, anyone may contribute. A worksheet is used to determine the maximum amount that can be contributed into the HSA, taking into account such factors as type of HDHP, the age of the account holder, the date the account holder became eligible and the date the account holder will no longer be eligible. As an example, in 2010, a person holding a self-only HDHP could contribute $3,050 per year, and a person holding a family HDHP could contribute $6,150.
Distributions
When you encounter a medical expense not covered under your HDHP, you may request a tax-free distribution from your HSA. To receive the money, the medical expense must be a qualified one--they are any out-of-pocket expenses that would qualify under the IRS definition of medical and dental expenses. Criteria are rather complicated, but basically any medical procedure or treatment intended to cure or treat a disease or some other problem with the body qualifies.
References
- U.S. Department of the Treasury: All About HSAs
- U.S. Department of the Treasury: Fact Sheet--Dramatic Growth of Health Savings Accounts
- IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans
- U.S. Department of the Treasury: HSA Frequently Asked Questions
- IRS Publication 502: Medical and Dental Expenses
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