- Created by the IRS, HSAs allow consumers to make contributions into a savings account that can be utilized for medical expenses. An HSA can be set up during an employer's open enrollment period or individuals can sign up for an account at a financial institution. Contributions are deductible on tax returns. Withdrawals from the account to pay for qualified medical expenses are not taxable. Any interest earned on the account is tax-free. After age 65, withdrawals from the account are no longer subject to an excise tax if used for non-medical purchases.
- The HSA contribution limit for single individuals filing tax returns in 2010 is $3,050. Filers over the age of 55 may contribute an additional $1,000. The family contribution limit is $6,150 and an additional $1000 for over-55 filers. Contributions over the set IRS amount incur a 6% penalty. In order to contribute to an HSA, individuals must be covered by a High Deductible Health Plan (HDHP). For 2010, the minimum qualifying deductible for individuals is $1,200 and $2,400 for families.
- Individuals seeking to open a Health Spending Account must be under the age of 65 and cannot be covered under Medicare. If someone can claim you as a dependent on their tax return, you are not eligible to open an account. Only individuals with a high deductible health insurance plan can open an HSA; other insurance coverage is not eligible. If withdrawals from the account are used for expenses other than medical, they will incur a 10% penalty and they are taxed as ordinary income.
- The new health-care law changes how HSA dollars are used. Previously both over-the-counter and prescription drugs could be purchased with HSA funds. Starting in 2011, only prescription drugs will be covered. Individuals wishing to purchase OTC medications with HSA dollars will need a prescription from a doctor.
Also in 2011, the penalty for purchasing non-medical items with HSA dollars increases to 20% for individuals under the age of 65.
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