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Health Savings Account Guidelines

written by: Lucinda Watrous•edited by: Jean Scheid•updated: 6/29/2011

Considering opening a health savings account but want to learn more first? Read on to find out about guidelines you must follow.

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    A health savings account (HSA) is a savings account meant specifically for medical expenses. The money deposited into the account is pre-tax, so it is a great way to save for medical expenses. However, there are a few eligibility requirements that must be met before someone can open a health savings account and begin to contribute to it.

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    Eligibility Requirements

    In order to be able to contribute to a health savings account, a person cannot be a dependent on someone else's tax return. You must have a high deductible insurance plan that is compatible with HSAs. People contributing to a HSA must be younger than 65. If you reach age 65 and are still with the same HSA, you can continue to maintain that account, but you cannot make contributions to it or open another one.

    If you are covered under another health plan that does not allow for health savings accounts to be opened, then you cannot qualify for an HSA. If you are eligible for Medicare, you are ineligible for a health savings account.

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    Health savings accounts are subject to underwriting the same way any other insurance plan may be, so if you have been previously denied because of a pre-existing condition, you probably will not be able to open an HSA.

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    2009 IRS Guidelines

    Each year, contribution limits and tax deductible amounts are determined by the IRS. For 2009, a single plan may contribute up to $3,000 to the plan, and a family plan may contribute up to $5,950.If the plan is open and active by December 1st of the year, then the full amount of contribution can be made for that year. If someone between the ages of 55 and 65 opens a health savings account, "catch up" contributions of an extra $1,000 each year. Employers are allowed to make contributions to their employees plans, though the combination of their contributions alongside the account owners cannot exceed the maximum allowable amount each year.

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    Withdrawals from the account are tax free for qualified expenses. In addition to qualified medical expenses, tax free withdrawals can be made to cover COBRA premiums, health insurance premiums while receiving unemployment compensation, and qualified long term health care insurance. If any withdrawals are made before reaching age 65 and used to pay for any medical expenses that do not qualify, they are subject to a 15% early withdrawal fee and income tax. If funds are withdrawn due to disability at any age, death, or after turning 65, there is no withdrawal penalty.

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    Qualified Expenses

    Most medical expenses fall under the "qualified" sector and will allow for tax free withdrawal. These include: abdominal supports, abortion, treatment for alcoholism and addiction, ambulance, organ transplant, prescriptions including birth control, prenatal and postnatal care, dermatologist, vision care, glasses, contacts, dentistry, lab work, blood tests, sterilizations, splints, oxygen, and more. If you are not sure whether something qualifies, talk to your insurance company or your doctor. If the procedure, bills, or medication applies to any cosmetic surgery, it is not covered as a qualified expense.