Health savings accounts, or HSAs, provide a tax-free way to save for medical expenses. The account stays with you even if you change employers or health plans.
To be eligible to open an HSA, you must be enrolled in a high-deductible health plan.
Advantages
According to the Treasury Department, HSAs offer several advantages.
Ownership: The money in the HSA---even employer contributions---is yours. There are no "use it or lose it" rules, according to the according to the Treasury Department. Moreover, you get to decide how much to contribute, when to use the money and where to save it.
Tax benefits: Contributions are deductible from your federal income tax, even if you don't itemize. If your employer makes contributions, they are not considered taxable income.
Flexibility: You can use HSA fund to pay for qualified medical expenses or save the money for future needs.
Affordability: High-deductible health plans (or HDHPs) generally have lower premiums than other types of health insurance.
Portability: You can keep your HSA even if you even if lose your job or move to another employer.
Interest: The money in an HSA earns interest.
Disadvantages
HSAs aren't the best option for everyone, and they have several disadvantages.
Higher out-of-pocket medical costs: Treasury Department regulations require you to enroll enroll in a health plan with a high deductible to qualify for an HSA. That means you will have more out-of-pocket responsibility for your health care costs
Limited use: HSA funds can be used only for qualified medical expenses. They are spelled out in IRS Publication 502, available at http://www.irs.gov/pub/irs-pdf/p502.pdf.)
Penalties: If you use the HSA for something other than qualified health care expenses, those funds are taxable and you face financial penalties, according to the Treasury Department.
Financial risk: For the HSA to be of value, you need to be diligent about saving money, according to "What You Need to Know about High Deductible Health Plans and Health Savings Accounts," published by Vimo. If you don't adequately fund the account, your medical expenses could significantly exceed the HSA balance.
Taxes: You must file an income tax return to enjoy all tax benefits of an HSA.
Limitations
The IRS limits how much you can contribute in a given year, and the figure is adjusted annually. For example, the maximum contribution for 2010 is $3,050 for individual coverage and $6,150 for family coverage.
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