What to Know About Health Savings Accounts

My employer is offering a high-deductible health-insurance policy next year but isn’t contributing anything to a health savings account. Can I contribute money to an HSA on my own and, if so, can I get a tax break?

Yes and yes. More employers plan to offer high-deductible health-insurance policies during open-enrollment season this year, and 20% of the large employers surveyed by the National Business Group on Health intend to make a consumer-directed health plan (generally a high-deductible policy) their only health-insurance choice in 2011. Many employers like high-deductible policies because raising the deductible not only lowers premiums but also tends to motivate workers to be more careful with their own health-care costs when they’re paying part of the bills themselves. (See Health-Insurance Changes for 2011 for more information.)

Some employers are also contributing money to employees’ health savings accounts as a way to encourage employees to pick the high-deductible policies. But you can contribute to an HSA on your own, even if your employer doesn’t add any money to the account. To qualify for a health savings account in 2010, your health-insurance policy must have a deductible of at least $1,200 if you have self-only coverage, or $2,400 if you have family coverage. Then you can contribute up to $3,050 to an HSA for the year if you have self-only coverage, or up to $6,150 if you have family coverage. (If you’re 55 or older, you can contribute an extra $1,000 for the year.) The deductible and contribution limits will remain at the same levels for 2011.

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You’ll get big tax benefits from the HSA. If your employer offers a high-deductible health-insurance policy, you may be able to make pretax contributions to the HSA, as you would with a flexible-spending account. If you open the HSA on your own, your contributions will be deductible when you file your tax return, even if you don’t itemize. Then the money grows tax-deferred and can be used tax-free in any year for medical expenses that aren’t covered by insurance -- such as deductibles, co-payments, prescription drugs, vision and dental care, and other out-of-pocket medical costs. (Starting in 2011, however, you cannot use tax-advantaged money from an HSA for over-the-counter drugs that are not prescribed by a doctor.) See What Health Reform Means for FSAs and HSAs for more information.

You’ll have to pay a 10% penalty (20% beginning in 2011) -- plus an income-tax bill -- if you use HSA money for nonmedical expenses before age 65. You’ll pay taxes, but no penalty, for nonmedical withdrawals after that. Unlike a flexible-spending account, money you don’t use from the HSA for the year can remain in the account for the future, and you can keep the account even after you leave your job. You can make future contributions to the HSA, however, only for months that you have a high-deductible health-insurance policy.

You can’t contribute to an HSA after you sign up for Medicare, but you can still use money in the account tax-free for medical expenses -- including Medicare Advantage, Medicare Part B and Medicare Part D premiums and part of your long-term-care premiums, in addition to out-of-pocket medical expenses.

If you buy insurance on your own -- if, for example, your employer doesn’t offer health insurance or you’re self-employed -- you can still contribute to a health savings account and benefit from the tax break as long as you have an eligible high-deductible health-insurance policy.

For more information about, see Health Savings Account Answers.