A health savings account, commonly referred to as an HSA, is a program that allows workers and retirees to save for future medical expenses with pre-taxed dollars. Group HSAs are also used by employers to allow employees to pay the deductible on high-deductible medical insurance plans that require deductibles ranging from $1,100 for a single taxpayer to $2,200 for families. Money invested in an HSA is fully vested and does not carry "use it or lose it" rules like flexible spending accounts.
Eligibility
Those who are enrolled in a high-deductible health plan may join a group HSA. Many employers offer HSA accounts as benefits in lieu of other medical benefits. Anyone enrolled in another health insurance plan cannot participate in an HSA. Those who receive Medicare are not eligible for an HSA. To be eligible for an HSA, you must not be claimed as a dependent on another person's tax return. Income limits do not apply to HSA eligibility requirements. Employees may hold long-term care insurance policies, insurance polices to cover dental, vision, accidents and disability, and still be eligible for an HSA. Companies can offer HSA participants an employee assistance program (EAP) in addition to the group HSA as long as there are not significant health benefits provided in the EAP.
Contributions
Contributions made to an HSA by an employer are not taxed, and are excluded from wages and earnings reported for the employee. You can take an HSA contribution as a tax deduction from the yearly tax return. New rules in 2007 allowed HSA account holders to make a transfer of IRA funds to an HSA without penalty. The maximum amount that can be contributed to an HSA varies from year to year. In 2008, the maximum allowance was $2,900 for an individual and $5,800 for a family. Catch-up amounts of up to $1,000 were allowed for seniors over the age of 55. Excess contributions must be withdrawn or penalized with an additional excise tax. Companies that provide contributions to an employee's HSA must make comparable contributions to every member of the group HSA.
Distribution
Withdrawals can be made from a group HSA for qualified medical expenses, including prescription drugs. The funds are not taxed when they are distributed. The individual who is covered by the high-deductible health plan as well as immediate family members can take tax-free distributions. A 10 percent tax, on top of the regular taxes, is attached to any distributions that are not qualified medical expenses, except when the account holder dies or becomes disabled. Qualified distributions in addition to medical expenses include paying COBRA premiums or any health insurance premiums while unemployed. Some long-term care insurance premiums can be paid with HSA funds without penalty.
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