AN OVERVIEW OF HEALTH SAVINGS ACCOUNTS
How HSAs work
A Health Savings Account (HSA) allows individuals who are covered by an HSA-compatible health plan to save money to pay for eligible medical expenses on a tax-free basis. Contributions are made before federal income taxes, Social Security taxes, and most state income taxes are calculated. HSA funds can earn interest or be invested. All earnings are tax-deferred and remain tax-free when used for eligible medical expenses. Any funds remaining in the HSA carry over from year to year and are never forfeited due to changes in employment.
For employees to have an HSA, some basic requirements must be met:
| 1. | The employee must be covered by an HSA-compatible health plan. The IRS defines the minimum deductible, maximum out-of-pocket, and eligible coverage requirements of an HSA-compatible plan. Limits for 2012 are listed below. A health plan representative can help determine if a specific plan qualifies. |
| IRS Limits for 2012 | Single Coverage | Family Coverage | |
| Minimum Deductible | $ 1,200 | $ 2,400 | |
| Maximum Out-of-pocket Limit | $ 6,050 | $ 12,100 |
| 2. | The employee cannot be covered by any non-qualified health plan as it constitutes ineligible coverage. Examples of ineligible coverage include: |
| • | Enrollment in a General Medical Flexible Spending Account (FSA) or Health Reimbursement Account (HRA). | |||
| • | Coverage under a spouse's Medical FSA or HRA. | |||
| • | Coverage under a spouse's health plan that is not an HSA-compatible health plan. | |||
| • | Enrollment in a prescription plan which provides benefits before the heatlh plan deductible is satisfied. Note: Programs which provide discounts (but not insurance coverage) on prescriptions are acceptable. |
| 3. | The employee cannot be enrolled in Medicare. |
| 4. | The employee cannot be claimed as a dependent on another person's tax return. |
Tax-free medical expenses
Like a Medical Flexible Spending Account, employees can use an HSA to pay for a wide range of out-of-pocket medical expenses with tax-free dollars. Eligible expenses may include:
- co-payments
- deductibles
- prescription drugs
- dental care
- vision care, eyeglasses, contact lenses
- chiropractic care
- individual psychological counseling
- certain over-the-counter medical items