- To open an account, participants must be below Medicare age and enrolled in a high deductible health plan. That means a minimum deductible of $1,200 for individuals and $2,400 for families. However, family plans with deductibles for individual members lower than $2,400 won't qualify, so check your plan first.
- Cash deposits to the account made by your employer, you or other family members are allowable up to the amount of the deductible. The Internal Revenue Service (IRS) sets these limits every year. For tax year 2010, the amount for individuals is $3,050 and $6,150 for families. Boosting deposits above those limits garners a 6 percent excise tax.
Those age 55 and up can donate an additional $1,000 to their account per year but are stopped once they enroll in Medicare. - Funds accrued in your HSA can be used to pay for medical expenses such as co-pays, dental work, vision wear, alternative medical treatments, smoking cessation and weight-loss programs--even medical massage. Yet certain expenses, such as cosmetic surgery, don't make the cut. Check with the IRS before you spend because distributions used for non-qualifying medical expenses get a 10 percent tax.
Although contributions may not be used to pay for health insurance premiums, there are exceptions. Those currently drawing federal or state unemployment or receiving COBRA continuation coverage may do so. - You can deduct all HSA contributions off your federal income tax, but state tax laws vary. Some states, such as Delaware and New York, apply the same tax treatment to HSAs as federal but others like California still require a tax.
Funds unused roll over into the next year, and interest and earnings are tax free. Although those enrolled in Medicare can't open an HSA, they can benefit from an existing one -- such as paying out-of-pocket prescription costs or doctor visits not covered by their plan. Moreover, those over 65 can use those funds for non-medical expenses -- without incurring the 10 percent tax penalty. - The NAHU recommends keeping records of distributions and deductions in case the IRS decides to audit you. File this information with the proper tax forms.
If your employer doesn't offer an HSA, you can establish one yourself through a qualified trustee such as a bank or institution approved to administer IRAs.
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