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Download our HSA information sheet for 2009.
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Health Savings Accounts
Health Savings Accounts (HSAs) and their compatible High Deductible Health Plans (HDHPs) are growing in popularity. HSAs are tax-advantaged accounts that can be used to save and pay for IRS qualified medical expenses, when paired with a qualified HDHP.
Opening & funding an HSA
Only individuals who meet the following criteria can open and fund an HSA plan:
- not enrolled in Medicare (note: Medicare eligibility alone does not affect HSA eligibility)
- are currently covered under a qualified high-deductible health plan (HDHP)
- are not covered under another non-HDHP health plan
- cannot be claimed as a dependent on another individual's tax return
Contributions to an HSA
Contributions to an individual's HSA can only be made if the individual currently has qualified HDHP coverage, and are pro-rated if HDHP coverage is terminated or the individual enrolls in Medicare (any part). The maximum annual contribution changes each year.
| Maximum Annual HSA Contributions | 2009 | 2010 |
|---|---|---|
| single coverage | $3,000 | $3,050 |
| family coverage | $5,950 | $6,150 |
| catch-up contribution for ages 55+ | $1,000 | $1,000 |
Contributions to an individual's account can be made by the account owner, a family member, or an employer. Contributions can be made up until April 15 for the preceding calendar year.
If HDHP coverage is in effect on the first day of the last month of the tax year (December 1 in most cases), the full maximum annual contribution can be made for that year. To retain tax advantaged status, the HDHP coverage must be maintained for 12 months. Otherwise penalties apply.
Individuals who have established an HSA but no longer have HDHP coverage can still use the HSA for expenses, but cannot make contributions. Excess contributions are subject to taxes and penalties.
HDHP requirements
To qualify for HSA compatibility, HDHPs must meet certain requirements.
The first set of requirements applies to deductibles and out-of-pocket maximums. These change annually:
| IRS HDHP limits by year | 2009 | 2010 | ||
|---|---|---|---|---|
| requirement | single | family | single | family |
| minimum deductible | $1,150 | $2,300 | $1,200 | $2,400 |
| maximum out-of-pocket | $5,800 | $11,600 | $5,950 | $11,900 |
Read more about how HSA-qualified health plans work.
Distributions from an HSA
HSA funds can be used for IRS qualified medical expenses for the individual, tax dependents, and spouse at any age, and as regular taxable income at age 65 and up.
Distributions can only be made as of the date that the HSA was established with compatible HDHP coverage. For qualified expenses, see IRS Publication 502. Distributions for non-qualified expenses are taxable income and will incur penalties.
About HSA vendors
Many financial institutions offer HSAs. We recommend reviewing options with your tax professional.
Set-up, maintenance and service fees can vary widely. Many insurers who offer HDHPs have certain HSA vendors that they recommend or with whom they have a discounted fee arrangement. Email us if you would like a comparison of popular vendors or visit HSA Insider's Open an Account section (not affiliated with Shargel & Co.)
Tax savings
Contributions to an individual's HSA are an "above the line" deduction on the account holder's personal income tax return.
Income taxes are reduced by the appropriate amount. Direct employer contributions will not appear on the employee's W-2 as income and cannot be included in the "above the line" deduction.
Total contributions by all sources cannot exceed the annual maximum.
For assistance, see your accountant or tax professional.
Account ownership & records
HSAs are owned by the individual account owner, regardless of who makes the contributions.
The account owner also holds full responsibility for substantiating claims and retaining records to prove that distributions are for qualified medical expenses. A husband and wife cannot co-own an account.
Health plan differences
Qualified HDHP plans have significant variations from traditional plans.
Here are the key differences:
- most plans have limited first-dollar preventive coverage (the IRS allows coverage for preventive care, but does not require or specify services to be covered)
- prescription drugs not covered until deductible is met
- all services except those preventive services specified in the evidence of coverage, are subject to the deductible, including office visits, emergency coverage, hospital, lab and x-ray, mental health, etc.