HSAs provide a tax-preferred means of paying for qualified medical expenses.
A health savings account (HSA) is a relatively new savings account for healthcare purposes that comes with special tax advantages. There are requirements, or qualifications, associated with the HSA that must be met to receive those tax benefits; however, this is a very flexible healthcare option, as opposed to a health flexible spending account.
What is a Health Savings Account?
A health savings account is an employee-owned savings account for qualified medical expenses. The account can be used to pay for your current medical expenses or future ones, as well as current or future expenses for your spouse or qualified dependent(s).
What Are the Rules for an HSA?
You must be enrolled in a high-deductible healthcare plan to have an HSA. For 2011, a healthcare plan is considered a high-deductible healthcare plan if it has a deductible equal to at least $1,200 for self-only coverage or $2,400 for family coverage. Annual out-of-pocket expenses are capped at $5,950 for self-only coverage and $11,900 for family coverage.
What are the Benefits of an HSA?
The benefits of an HSA are that contributions your employer makes to your HSA account are not included in your gross income and your contributions are made on a pretax basis, which reduces your taxable income. One unique benefit of HSAs is that the account is portable; once an account has been established for you, you own it and can take it with you if you change jobs. The only requirement is that you maintain high-deductible healthcare coverage. Finally, the interest you earn on the account can be distributed tax-free, along with the principal, provided that the proceeds are used for qualified medical expenses.
For What Purposes Can You Take a Distribution From an HSA?
You can take tax-free distributions from your HSA for qualified medical expenses. Paying your healthcare premiums, including COBRA premiums if you have lost your coverage, constitutes having a qualified medical expense. IRS Publication 502 addresses medical and dental expenses and has a list of qualified medical expenses. If you take a distribution and use it for something other than qualified medical expenses, you must include the distribution in your taxable income; the distribution may be subject to an additional 10 percent penalty.
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