A Health Savings Account (HSA) is a tax-exempt trust or custodial account set up with a qualified HSA trustee to pay or reimburse certain medical expenses incurred by the covered individual or family. HSAs are available to everyone covered under a high deductible health insurance plan. The health insurance plan's annual deductible must be at least $1,150 for individual coverage or at least $2,300 for family coverage, as of 2009. Also, the maximum limit for the annual deductible plus other out-of-pocket expenses must equal no more than $5,800 for individual coverage or $11,600 for family coverage, as of 2009. Individuals who are covered under other health insurance or are enrolled in Medicare are not eligible for HSAs.
HSAs can be established by individuals or employers. HSA contributions by an employer are excluded from the individual’s taxable income and are not subject to FICA taxes. Contributions by an individual, a family member, or anyone other than an employer are tax-deductible to the individual even if he/she does not itemize his/her deductions. Contributions made each year are tax-deductible up to the amount of the health insurance policy’s annual deductible, subject to a maximum of $3,000 for individuals or $5,950 for families, as of 2009. Individuals age 55 or older can make additional contributions of up to $1,000 per year, as of 2009. For example, an individual who is age 60 and has self-only coverage could contribute up to $4,000 for 2009. Because the contribution limits apply to employers and employees on a joint basis, any employer contributions will reduce the employee's allowable contribution amount.
The interest and investment earnings generated by assets held within the HSA are not taxable while in the HSA. Amounts distributed from the HSA are not taxable as long as they are used to pay for qualified medical expenses. See IRS Publication 502 for a full description of qualified medical and dental expenses. Note that both prescription and over-the-counter drugs are qualified medical expenses for the HSA. Medical expenses can be paid by direct debit from the HSA or paid out-of-pocket by the individual who then requests reimbursment from the HSA. Amounts distributed from the HSA which are not used to pay for qualified medical expenses will be included in the individual's taxable income, plus an additional 10% penalty tax may apply. Distributions made after the individual is disabled, reaches age 65, or dies are not subject to the 10% penalty tax. Expenses paid from the HSA are not tax-deductible. All distributions, quallified or non-qualified, must be reported on the individual's income tax return in the applicable year.
HSAs are portable, so an individual is not dependent on a particular employer to enjoy the advantages of having an HSA. Like an individual retirement account (IRA), the HSA is owned by the individual, not the employer. If the individual changes jobs, the HSA goes with the individual. The HSA is not a “use-it-or-lose-it” account. All contributions to the HSA remain in the account from year to year until they are used by the individual. If the HSA owner selects his/her spouse as the beneficiary, the HSA will be treated as the spouse's after the owner dies. If the beneficiary is not the spouse, the fair market value of the HSA becomes taxable to the beneficiary at the owner's death.
All HSA limitation amounts presented here are current for 2009 but may be adjusted for inflation in future years. See IRS Publication 969 for additional details about Health Savings Accounts and IRS Publication 502 for Qualified Medical and Dental Expenses.
