Establishing an HSA

(Page 2 of 2 of Introduction to Health Savings Accounts (HSAs) )

Many employers offer HSA's as part of a benefits package. If an HSA is not offered as one of your employee benefits, you can establish an account at any number of banks, credit unions, insurance companies, or other entities that meet IRS requirements. When shopping for a place to open your HSA, start by inquiring at institutions where you already are a satisfied customer. You also can get a list of participating banks and plan administrators from HSA Insider, at

The account you open should pay interest -- there may be a minimum balance requirement before interest accrues -- and provide the opportunity to invest in mutual funds, stocks, and bonds (just like an IRA or 401(k) does).

You can complete all the paperwork and make the required minimum deposit to your HSA prior to your HDHP coverage becoming effective. However, your account is not officially "established" until your health plan coverage begins.

Contributing to an HSA

Contributions to an HSA can come from you, your employer (if the company offers such a benefit), or both.

For 2010, the maximum contribution, from all sources, for individual coverage is $3,050, and the maximum contribution for family coverage is $6,150. A catch-up provision of $1,000 in 2010 also applies for participants who are between 55 and 65 years old. (You cannot continue to contribute to an HSA after you enroll in Medicare.)

Contributions can be made monthly, in a lump sum, or on any schedule and in any amount you like, so long as you meet the HSA administrator's minimum deposit requirements and do not exceed the annual maximum contribution limit.

Paying Your Medical Expenses with an HSA

You can withdraw funds from your HSA, tax-free, to pay for any qualified medical expense incurred after you established your account. Qualified medical expenses are defined in IRS Publication 502, Medical and Dental Expenses (available at

Because nobody approves or declines your HSA withdrawals, it is your responsibility to accurately determine what is a qualified medical expense and what is not. If your HSA money is used for anything else, you will pay taxes on the withdrawal. If you are not disabled or older than 65, you also will be subject to a 10% penalty. Keep receipts for all your expenditures, in case you are audited.

If your HSA administrator has provided you with a checkbook or debit card, you can pay your health care providers directly from your account. Otherwise, you must pay with your own money and then reimburse yourself from the account.

Though many expenses can be paid for with HSA funds, healthcare premiums cannot, with these exceptions:

  • long-term care insurance premiums (the amount considered a qualified medical expense depends on your age, as explained in IRS Publication 502)
  • premiums for continuation of health insurance under COBRA
  • premiums for health coverage while you are receiving unemployment compensation, and
  • medicare premiums, deductibles, and copays (but not a Medicare supplemental insurance, or "Medigap," policy, if you are over 65).

Check with your HSA administrator or other qualified advisor before taking a questionable distribution or using HSA funds to pay premiums.

Is an HSA Right for You?

Whether an HSA will be the best option for you depends on your own particular circumstances and goals. For example, if you would rather pay higher monthly premiums for the guarantee that you will not have to pay thousands of dollars out of pocket, then you might prefer a traditional health plan. An HSA also would not be a good option if you were not sure you could contribute and maintain a high enough balance to cover the entire deductible at all times.

If, however, your main priority is choosing the lowest-cost option, you'll have to do a comparison between an HDHP/HSA plan and a traditional health plan. The evaluation can be somewhat complex, because you will be factoring in tax savings for the HSA, and making projections about how high your medical expenses are likely to be in the coming years.

For help determining whether an HSA is the best option for you, consult an account administrator or other HSA or insurance advisor. (To learn about health insurance benefits granted you by law, see Nolo's article Getting the Most From Your Health Insurance.)

For More Information

For easy-to-read, practical advice on planning your family's finances, get The Busy Family's Guide to Money, by Sandra Block, Kathy Chu and John Waggoner (Nolo).

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