A health savings account lets you put money aside tax free for medical expenses. The money in the account belongs to you, but the U.S. Department of the Treasury has strict rules and regulations governing HSAs. Some of these address eligibility. For example, to open or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan. Treasury also limits on how much you can save each year. For 2010, the maximum is $3,050 for individual coverage and $6,150 for family coverage.
Many of the rules, however, deal with how you use the money in your HSA. Withdraw it for the wrong purpose and you face taxes and penalties.
No law bars using HSA funds for non-qualified expenses. It's fiscally unwise, however. The IRS will treat that money as taxable income and, if you are younger than 65, you will be assessed an additional 10 percent penalty.
After 65, the penalty is waived, but non-qualified withdrawals are still taxable.
You can make tax-free withdrawals of HSA funds for "qualified medical expenses.” IRS Publication 502 provides a comprehensive list. Among the items that qualify are dental care and vision services (including prescription glasses), prescription drugs, physician visits, acupuncture, alcoholism treatment, vasectomy, psychiatric care, speech therapy, artificial limbs, chiropractic services and physical therapy.
Many over-the-counter drugs qualify, including pain relievers, decongestants, laxatives, nasal sprays, pain relievers, and peroxide and rubbing alcohol.
Be aware that some health-related expenses fall into the non-qualified category, including electrolysis, nutritional supplements and most cosmetic surgery.
Consultants at the Principal Financial Group say you should keep records of your qualified withdrawals. You are responsible for substantiating that each HSA withdrawal is for a qualified medical expense.
Generally, insurance premiums (including health insurance premiums) are not qualified medical expenses. The IRS makes a few important exceptions, however. For example, you can use your HSA to pay for long-term care insurance premiums, COBRA premiums and health insurance premiums while you are on unemployment. IRS Publication 502 spells out the exceptions and the limitations.
Closing the Account
You can close your HSA at any time and withdraw the money. If you use the funds for non-qualified expenses, you must pay taxes and (if you are younger than 65) the 10 percent penalty.
If your spouse is the HSA beneficiary, he or she is treated as the owner, according to the IRS. In other situations, the account will no longer be treated as an HSA. Your estate or beneficiary will be liable for taxes but not the penalty.
Irene Blake has been a professional writer since 1989; she covers health and the business of health care for consumer and business markets. Her work has appeared in the "Christian Science Monitor," "Medical Device Daily," Healthywomen.org, NewsRx and "Consumer-Driven Healthcare." She holds a master's degree from a major Southern university.