A Health Savings Account, or HSA, is a tax-exempt account which allows you to accumulate funds to pay for medical expenses.  In combination with a federally qualified high deductible health plan,, or HDHP, you may be able to substantially reduce the cost of your medical insurance and medical expenses.

By choosing a high-deductible health plan (HDHP), you will save on my monthly health premiums.  Instead of paying a large monthly premium to an insurance company each month, you will pay a much smaller premium.  The difference in premium is money that you control because you didn't send it to the insurance company.  And, it will be available to you in the event that you have claims to pay.  However, if you don't have claims, the money is still in your hands.

Once you have a HDHP, you can open a Health Savings Account with a financial institution.  Annual fees run around $40-$50 dollars.  The money you deposit with that  administrator will earn interest or can be invested.  You can also enjoy tax savings because any contributions by you into that HSA account can reduce your taxable income and result in lower federal taxes. 

The money that you have set aside into a HSA account can be used on a tax-free basis to pay your medical bills on a broad basis:  doctor, hospital, prescription drugs, certain over the counter medications, vision and dental expenses are all included.

Deductible Requirements

The minimum health plan deductible for Tax Year 2010 is $1,200 for Single and $2,400 for Family.

Maximum Out-of Pocket Exposure

The maximum out-of-pocket exposure for Tax Year 2010 is $5,950 for Single and $11,900 for Family.

Maximum Contributions

The maximum contributions for Tax Year 2010 is $3,050 for Single and $6,150 for Family.  Each year, you are allowed to contribute the lower of your annual deductible or the maximum amount listed above.  For those age 55 and over, you can contribute an additional $1,000 as a catch-up provision.

Flexibility

Funding your HSA Account each year is optional.  You can fund it as you incur medical expenses or you can accumulate funds for your future expenses.  You actually have until April 15th each year to fully fund last year's HSA account.

Eligible Expenses (IRS Publication 502)

• Abdominal supports
• Abortion
• Acupuncture
• Air conditioner (when necessary for relief from difficulty in breathing)
• Alcoholism treatment
• Ambulance
• Anesthetist
• Arch supports
• Artificial limbs
• Autoette (when used for relief of sickness/disability)
• Birth Control Pills (by prescription)
• Blood Tests
• Blood transfusions
• Braces
• Cardiographs
• Childbirth/Delivery
• Chiropractor
• Christian Science Practitioner
• Contact Lenses
• Contraceptive devices (by prescription)
• Convalescent home (for medical treatment only)
• Crutches
• Dental Treatment 
• Dental X-rays
• Dentures
• Dermatologist
• Diagnostic fees
• Drug addiction therapy
• Drugs (prescription)
• Elastic hosiery (prescription)
• Eyeglasses
• Fees paid to health institute prescribed by a doctor
• FICA and FUTA tax paid for medical care service
• Fluoridation unit
• Guide dog
• Gum treatment
• Gynecologist
• Hearing aids and batteries
• Hospital bills
• Hydrotherapy
• Insulin treatment
• Lab tests
• Lead paint removal
• Legal fees
• Lodging (away from home for outpatient care)
• Metabolism tests
• Neurologist
• Nursing (including board and meals)
• Obstetrician
• Operating room costs
• Ophthalmologist
• Optician
• Optometrist
• Oral surgery
• Organ transplant (including donor's expenses)
• Orthopedic shoes
• Orthopedist
• Osteopath
• Oxygen and oxygen equipment
• Pediatrician
• Physician
• Physiotherapist
• Podiatrist
• Postnatal treatments
• Practical nurse for medical services
• Prenatal care
• Prescription medicines
• Psychiatrist
• Psychoanalyst
• Psychologist
• Psychotherapy
• Radium Therapy
• Registered nurse
• Special school costs for the handicapped
• Spinal fluid test
• Splints
• Sterilization
• Surgeon
• Telephone or TV equipment to assist the hard-of-hearing
• Therapy equipment
• Transportation expenses (relative to health care)
• Ultra-violet ray treatment
• Vaccines
• Vasectomy
• Vitamins (if prescribed)
• Wheelchair
• X-rays

Eligible Over-the-Counter Drugs (For HSA Distributions)

• Antacids
• Allergy Medications
• Pain Relievers
• Cold medicine
• Anti-diarrhea medicine
• Cough drops and throat lozenges
• Sinus medications and nasal sprays
• Nicotine medications and nasal sprays
• Pedialyte
• First aid creams
• Calamine lotion
• Stop-smoking programs
• Wart removal medication
• Antibiotic ointments
• Suppositories and creams for hemorrhoids
• Sleep aids
• Motion sickness pills

Ineligible Medical Expenses

• Advancement payment for services to be rendered next year
• Athletic club membership
• Automobile insurance premium allocable to medical coverage
• Boarding school fees
• Bottled water
• Commuting expenses of a disabled person
• Cosmetic surgery and procedures
• Cosmetics, hygiene products and similar items
• Funeral, cremation, or burial expenses
• Health programs offered by resort hotels, health clubs, and gyms
• Illegal operations and treatments
• Illegally procured drugs
• Maternity clothes
• Non-prescription medication
• Premiums for life insurance, income protection, disability, loss of limbs, sight or similar benefits
• Scientology counseling
• Social activities
• Special foods and beverages
• Specially designed car for the handicapped other than an autoette or special  equipment
• Swimming pool
• Travel for general health improvement
• Tuition and travel expenses a problem child to a particular school
• Weight loss programs

Ineligible Over-the-Counter Drugs

• Toiletries (including toothpaste)
• Acne treatments
• Lip balm (including chapstick or carmex)
• Cosmetics (including face cream and moisturizer)
• Suntan lotion
• Medicated shampoos and soaps
• Vitamins (daily)
• Fiber supplements
• Dietary supplements
• Weight loss drugs for general well being
• Herbs

Health Insurance may not be purchased with HSA Funds. There are 4 situations which are exceptions whereby HSA funds can be used to pay for:

1. A health plan during any period of continuation coverage required under any federal law.

2. A qualified long-term insurance contract

3. A health plan during a period in which the individual is receiving unemployment compensation under federal or state law

4. For individuals over age 65, premiums for Medicare Part A or B, a Medicare HMO and/or the employee share of premiums for the employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance.

1Revenue Ruling 2003-102, 2003-38 I.R.B. 559

Distributions

• Funds can be used tax-free at any time for eligible medical expenses.
• As of age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax without any IRS penalty.
• Prior to age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax and a ten percent IRS penalty.
• Upon the account holder's death, the assets in the HAS become the property of their named beneficiary.  If there is no named beneficiary, the assets go into the account holder's estate.

- If the beneficiary is a spouse, the HSA may be treated as their own account.

-  If the beneficiary is a non-spouse, the HSA must be treated as ordinary income for tax purposes.

Further Information

HSA administrators, such as HSABank, Wells Fargo or Chase can provide further information.