What are HSAs and how do they work?

Health Savings Accounts were established by the federal government in 2003 so that individuals covered by qualified high-deductible health plans could save money on a pre-tax basis for expenses related to medical, dental and vision care. Typically, an adult who's covered by a qualified high-deductible health plan may establish an HSA. Your account can be set up through any qualified provider-it doesn't necessarily have to be connected to your health insurance company.

What are the tax benefits of establishing an HSA and using it to pay medical expenses?

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The money that your employer contributes to your HSA is deposited on a pre-tax basis. That means it may be excluded from your gross earnings, allowing you to pay taxes on less income. When you make your own contributions to your HSA, that money is tax-deductible even if you don't itemize your deductions on Form 1040. What's more, any interest the money earns while in the HSA and any distributions for qualified expenses are also tax-free.

Is an HSA the same as a FSA?

Many people confuse HSAs with Flexible Spending Accounts (FSAs), since both programs are designed to save money on a pre-tax basis to help offset the costs of QMEs. Though there are several differences between HSAs and FSAs, the main difference relates to how long you can hold onto the money. With an HSA, you can keep the funds until retirement, if you choose. In addition, the money is yours if you change jobs, retire or switch health plans. But with an FSA, you must "use it or lose it" each year. For example, if you've saved $1,000 in your FSA but have only used $550 for qualified expenses, you'll forfeit the remaining $450 at the end of the year.

Who qualifies for an HSA, and how much can they contribute to their HSA each year?

To qualify for an HSA, you must be:

* Covered through a qualified high deductible health plan (qualified plans have minimum deductibles and out-of-pocket maximums defined by the federal government)

* Generally speaking, have no other health coverage

* Not be eligible for Medicare

* Not be claimed as a dependent on someone else's tax return.

For individuals, the maximum contribution amount for 2013 is $3,250. For families, the maximum is $6,450. These limits reflect totals from both employer and personal contributions. A catch-up contribution of $1,000 for 2013 is allowed for plan participants 55 and older.

What expenses can I pay with the money in my HSA?

Only qualified medical expenses (QME) can be paid through your HSA. As the IRS puts it, these are defined as "expenses related to the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body." These expenses can only be reimbursed through your HSA if they aren't covered through insurance or other sources. For a complete list of QME, or if you'd like to find out if a particular expense qualifies, please visit IRS Publication 502 .

What's the process for paying for a covered expense through my HSA?

As long as it's for a QME, you can use your HSA to make withdrawals, set up recurring payments, or reimburse yourself for past payments at any time. Keeping proper records of expenditures is your responsibility as the account holder, and having proof (such as receipts, claim statements, canceled checks, etc.) of each expense is a legal obligation between the account holder and the IRS.

At the end of each year, your HSA provider will submit a 1099-SA form to the IRS that outlines all distributions from your HSA for that tax year. For any non-qualified withdrawals, HSA account holders under age 65 will typically incur regular income tax charges plus a 20 percent penalty.

Can I use my HSA to pay QMEs for a dependent that's not on my health insurance plan?

Typically, funds in your HSA can be used to pay QMEs for you, your spouse, or dependents, even if they're on a different insurance plan.

What if I have more questions?

Your questions help keep us tuned in to the topics that are most important to our members. We hope these FAQs have helped clarify how HSAs work and how they might benefit you and your family. Contact us to find out more about how HSAs can help you.