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With a health savings account, or HSA, you save money tax-free to cover big deductibles, while a cheaper insurance policy protects you against major bills. Here are answers to common questions.
Who can get a health savings account?
Anyone under age 65 who buys a qualified high-deductible policy can open an HSA. You can't be covered by another health insurance policy that isn't a qualified high-deductible plan (either as an individual or a dependent), although you can still have other disability, dental, vision and long-term-care policies. (See "Employee coverage vs. individual plans.")
How much can I contribute annually to an HSA?
You can contribute the amount of the deductible on your policy, this year up to $2,850 for singles and $5,650 for families. If you are 55 or older, you can put in an extra $800.
In 2008, you can contribute up to $2,900 for individual coverage or $5,800 for families. People age 55 and older can make a catch-up contribution of $900.
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Any high-deductible policy can qualify, as long as it meets the IRS requirements. The deductible must be at least $1,100 for individuals or $2,200 for families, both this year and in 2008. The annual out-of-pocket expenses in 2007 cannot exceed $5,250 for an individual or $10,500 for a family, including the deductible and copayments (but not premiums). In 2008, the limits are $5,600 and $11,200. So individuals can buy high-deductible policies on their own, or through their employers.
If you're buying a plan on your own, be sure to ask your health insurance company if it qualifies, says Victoria Bunce, research and policy director for the Council for Affordable Health Insurance.
How and where can I open a health savings account?
It depends on whether you're buying coverage on your own or getting it through your employer.
On your own: You can find a list of health insurance companies offering HSA-eligible plans in your state at HSAInsider.com or HealthDecisions.org. You can compare several companies' policies in most states at eHealthInsurance.com, or search for a local agent who knows which policies are available in your area at the National Association of Health Underwriters Web site. The list of companies offering HSA-eligible plans continues to grow every month.
Through your employer: If you get health insurance through your employer, you may have seen an HSA-eligible option during last year's open enrollment period (generally in the fall). If not, talk to your benefits manager to see if HSAs will be on your health insurance menu. Choosing an HSA could knock down your share of premiums significantly, and some employers may choose to fund all or part of the HSA for you -- perhaps even adding a 401(k)-style match.
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If your employer offers a high-deductible health insurance policy, you may be able to make pretax contributions, like you would with a flexible spending account. If you open the HSA on your own, your contributions will be deductible when you file your taxes, even if you don't itemize.
For 2007, you'll be able to deduct the lesser of either your insurance deductible or $2,850 for individuals; $5,650 for families. If you're between the ages of 55 and 65, you can add an additional $800 to the deduction limits.
For 2008, you'll be able to deduct the lesser of either your insurance deductible or $2,900 for individuals; $5,800 for families. If you're between the ages of 55 and 65, you can add an additional $900 to the deduction limits.
Do the tax benefits phase out at certain income levels?
Unlike many other tax breaks, there aren't any income limits. Anyone under age 65 who buys a qualified high-deductible policy can open an HSA.
What's the difference between the new HSAs and the flexible spending accounts? It seems they are for the same purpose.
The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred.
Money in your flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy. (See "Flex plan options when you leave your job.")
If my employer offers both, can I fund my flexible spending plan, too?
No. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage (say, through a spouse's policy). However, if your flex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA, too.
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You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% penalty -- plus an income-tax bill -- if you use any of the money for nonmedical expenses before age 65.
What happens if I want to withdraw the money for nonmedical expenses after age 65?
You won't be hit with the 10% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.
Can a couple who is planning to retire early open an HSA?
Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $800 in 2007 if you're 55 or older. This catch-up contribution amount will increase by $100 per year until it reaches $1,000 in 2009. You can't make new HSA contributions after age 65.
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No. Your HSA contributions won't affect your IRA limits -- $4,000 per year or $5,000 for those over 50 (increasing by $1,000 each for 2008). It's just another tax-deferred way to save for retirement.
This article was reported and written by Kimberly Lankford for Kiplinger's Personal Finance Magazine.
Updated June 5, 2007
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