Setting Up and Using a Health Savings Account ( HSA ): Eligibility, Tax Advantages, and Reimbursement

The Health Savings Account (HSA) is a tax-advantaged plan intended to be used by individuals for covering medical expenses. Simply stated, it is a savings account that is designed to allow you to save for and pay your medical bills. Money deposited to this account creates a tax deduction on your Federal (and probably State) tax return. You maintain ownership and control of the account. You pay your qualified medical bills with a check or debit card from this account. Unused amounts remain in your account for use in future years, even remaining for use in retirement.

There are four basic requirements that must be met:

1. Before you can open an HSA, you must have a health insurance plan that has a high deductible, called a High Deductible Health Plan (HDHP). The HDHP must follow the IRS guidelines for both the deductible amount and the maximum out-of-pocket amount. The qualifying deductible guidelines are:

• • Minimum deductible - Single Coverage - 2009 - $1,150.00 | 2010 - $1,150.00
  • Minimum deductible - Family Coverage - 2009 - $2,300.00 | 2010 - $2,400.00
  • Maximum Out-of-Pocket - Single Coverage - 2009 - $5,800.00 | 2010 - $5,950.00
  • Maximum Out-of-Pocket - Family Coverage - 2009 - $11,600.00 | 2010 - $11,900.00
  • (out of pocket includes co-pays and deductibles)

Your health insurance provider will be able to tell you if the plan you are purchasing will qualify for a HSA. In fact, many providers will have plans specifically labeled as HSA qualified plans.

2. You cannot have any other health coverage other than the HDHP

3. You cannot be claimed as a dependent on someone else’s tax return.

4. You cannot be covered by Medicare.

Once you have determined that you have met the requirements above, you are ready to set up your HSA.

• Choose where you will deposit and maintain your HSA account. Your HSA must be maintained by a qualified third party, such as a bank, credit union, or savings and loan. It does not have to be selected by your health insurance provider.

• Review the monthly/yearly service fees. Compare these rates. They tend to range from $2.50/ month to $15.00/month. A few will have no service charges.

• Additionally, determine how much interest or investment income your account will make. These tend to range from .5%- 4.5% annualized return.

• Finally, determine how you will withdraw from the account. Most HSA accounts simply issue a checkbook and a debit card and you will be in complete control of what medical expenses are reimbursed or direct paid. Less often, the account will be set up so that you submit your receipts and then receive a reimbursement check from your account.

Ideally you will choose based on low fees, good investment rates, and convenience.

Deposit your funds, noting the limitations below. For the most part, the deposit must be in cash (or check), unless you are rolling over funds from another HSA (or possibly from your flexible spending account).

• Limitations on yearly deposits
• 2009 - Single coverage $3,000.00 Family $5,950.00
• You may contribute an additional $1000.00 if you are 55 or over by 12/31/2009
• 2010 - Single coverage $3,050.00 Family $6,150.00
• You may contribute an additional $1000.00 if you are 55 or over by 12/31/2010
  
• Keep track of your deposits. The amounts deposited will be tax deductible, whether you use the amounts for reimbursement or just leave it in the account.
• Deposits must be made by April 15th of the following year. For example, 2009 deposits can be made up to April 15, 2010.