Health Savings Accounts (HSA’s)

Health Savings Accounts (HSAs) are tax-sheltered savings accounts much like IRAs but your contributions can only be used for medical expenses, withdrawn tax free. Your deposits are also 100% federal tax deductible and can be used to pay for routine medical expenses until your deductible
has been met. The amount you have deposited grows, tax-free, until you need to use it.

Your HSA is combined with a High Deductible Health Plan (at least $1200 for individual coverage and $2400 for family coverage). Your premiums for such a plan are much lower than usual, because the deductible is higher. The money you put into your HSA is used to cover those expenses. Once you’ve reached your deductible amount, your health plan starts covering your costs. If you have a need for major medical assistance, your plan will cover it. If you rarely need health insurance coverage, the account will grow to supplement your retirement.

The amount of money you can put into your account each year is not limited by the size of your deductible. In 2010 individuals can contribute up to $3050 per year and families can contribute $6150 regardless of the deductible limit in their HSA qualified plan. Individuals 55 and older can make additional catch-up contributions until they enroll in Medicare. For 2010 the amount is $1000. HSAs are simple to understand. There is only one deductible, applied to your whole family. Any covered medical expenses that you incur are applied against that deductible amount each year. What is included as a covered medical expense is set by the IRS, not your health insurance company.

Covered medical expenses include:

  • prescription and over-the-counter drugs;
  • dental services, including braces, bridges and crowns;
  • vision care, including glasses and lasik eye surgery;
  • psychiatric and certain psychological treatments;
  • long-term care services; and
  • medically-related transportation and lodging.
  • For a more extensive list view IRS
    Publication 502

If you find yourself unemployed, you can use money out of your HSA to pay your health insurance premiums, with no penalty.

If you use your HSA to pay for items that are not considered covered medical expenses, you will be taxed on the amount withdrawn, and charged
a 10% penalty fee. This is done to deter you from using your HSA for non-medical purposes.

If you are self-employed, HSAs may be the answer for you, as you may be able to deduct 100% of the health insurance premiums you pay. This
is if you are not already eligible to participate in a plan sponsored by an employer or your spouse’s employer.


  1. Past-year contribution limits will be eliminated. If an individual establishes an HSA mid-year, current law restricts contributions for the remainder of the year to one-twelfth of the annual limit per month, now, HSA participants will be able to contribute up to the annual maximum regardless of when the HSA is established.
  2. Employers will be allowed to make a one-time transfer of unused FSA and HRA money to an HSA, provided the transfer occurs before January 1, 2012.
  3. A one-time transfer will be allowed between an IRA and an HSA on a non-taxable basis.

Other helpful information concerning Health Savings Accounts:

1. Frequently Asked Questions

2. Recommended Banks and Administrators