HSA's, or Health Savings Accounts, allow workers to divert a portion of their pre-tax income into an account that that is used to pay qualifying medical expenses. HSA's must be paired with a high-deductible health insurance plan. For persons with single-person coverage, the 2010 contribution limit is $3,050. For persons with family coverage, the limit is $6,150. The limits increase annually.
High-deductible health plans feature lower premiums but higher out of pocket costs. For example, the average health insurance premium in 2010 was about $13,000. High deductible plans cost an average of $11,000. While typical health plans may pay for preventative care, high-deductible plans don't cover any expenses until the deductible is reached. Deductibles in these plans must be at least $1,200 for single coverage and $2,400 for family coverage in 2010. These minimums change each year. The plans feature maximum out-of-pocket expenses of $5,950 for single coverage and about $12,000 for family coverage. Public policy experts believe that high deductible plans will help lower the cost of health care because people with such coverage will shop around.
Employers and/or employees can make contributions to HSA plans. In fact, anyone can make a contribution to your HSA, and it will be tax deductible. Persons who receive health insurance through their employers often receive a contribution to an HSA from their employer. According to the IRS, this contribution must be included in the maximum contribution.
Contributions made to an HSA are pre-tax. That means contribution amounts reduce your adjusted gross income (AGI), and therefore your tax burden. You do not have to make contributions monthly. Lump sum contributions are permitted, and you can make your annual contribution for the previous tax year anytime before your tax filing date. For example, persons with HSA's could make contributions for the 2009 tax year anytime before April 15, 2010. The 2009 limits were $3,000 for persons with single coverage and $5,950 for persons with family coverage.
Contributions above the limits are subject to a 6 percent excise tax. Taxpayers can remove excess contributions "by the due date, including extensions, of your tax return for the year the contributions were made," according to the IRS. Taxpayers must also remove any additional interest or investment income on the withdrawn contribution. Money removed from an account after this deadline, when it doesn't go toward medical expenses, is taxed at the taxpayer's normal rate, plus a 10 percent penalty.
The IRS allows workers aged 57 or older to contribute an additional $1,000 to an HSA. For 2009, this means that a qualifying worker can contribute $4,000. This may be a benefit to older workers who are considering retiring, because the rules permit people over 65 to use HSA money for insurance premiums, including Medicare.
The balance of an HSA account can carry over from year to year, allowing some workers to accrue sizeable balances. Funds are typically held in interest bearing accounts, and earnings on HSA funds are tax-free. Several banks offer HSAs with investment options, provided balances reach appropriate levels. Some offer investment options in stocks and mutual funds.
Philadelphia-based freelancer Pat Kelley has been writing since 2002, most recently for Scripps Texas Newspapers. He has won numerous awards for reporting. He holds a Bachelor of Arts in political science.