A Health Savings Account, sometimes referred to as an HSA, is a hybrid product that combines a tax-advantaged savings account with a high deductible health insurance policy. The savings account portion of an HSA must be established with a trustee or custodian, which can be a financial institution, such as a bank, an insurance company, or any other institution that serves as a trustee for individual retirement accounts.
Contributions
Taxpayer contributions to the savings portion of a health savings account are deductible from the taxpayers taxable income up to certain limits, which may be adjusted from time to time. Limits for the 2010 tax year are $3,050 for single taxpayers, and $6,150 for plans that cover the family. Contributions to the savings portion of an HSA that are made by an employer on behalf of an employee may be considered a salary reduction contribution that is made with pretax dollars.
Health Insurance
Taxpayers are required to purchase a high deductible health insurance policy as an integral component of their health savings account. High deductible health insurance policies are designed to protect the policyholder in the event of catastrophic medical expenses. Health insurance policies must have a minimum deductible of $1,150, and a maximum deductible of $5,800, for single coverage to qualify as a high deductible policy. Taxpayers who pay their own health insurance premiums may include the cost of those premiums in their medical and dental expenses if they elect to itemize their deductions.
Limitations
Medical and dental expenses, including premiums paid for a high deductible health insurance policy, must exceed 7.5 percent of the taxpayer's adjusted gross income before they qualify as an itemized deduction. Deductible payments and out of pocket expenses that are not covered by the high deductible health insurance policy may be included in medical and dental expenses, provided these costs were not paid for, or reimbursed by, withdrawals from the savings portion of the taxpayer's health saving account.
Distributions
Funds contributed into the savings portion of an HSA are allowed to remain in the account. Unlike funds in a flexible spending account, HSAs do not have a use-it-or-lose-it feature. Funds in an HSA may be invested in a wide variety of investments, much the same as a traditional individual retirement account. Taxpayers can take tax-free distributions from an HSA to pay for qualified medical expenses. Unused funds that remain in the account may be withdrawn for any reason without incurring a tax penalty once the taxpayer reaches age 65.
Tags: deductible health, deductible health insurance, high deductible, health insurance policy, insurance policy, savings account
