Established in 2003 under the Medicare Prescription Drug Improvement and Modernization Act, Health Savings Accounts (HSAs) are tax-exempt savings accounts used to pay qualified medical expenses of the account owner as well as cost-sharing requirements (e.g., co-payments, deductibles, and premiums). As long as the funds are spent on qualified medical expenses, all contributions, capital gains, and withdrawals remain untaxed. Like many other bank accounts, HSAs come complete with debit cards and checks. Individuals interested in establishing an HSA must locate an entity that accepts these accounts; they cannot simply call an ordinary savings account an HSA.
Individuals can set up and contribute to an HSA if they have a qualifying high deductible health plan (HDHP) and no disqualifying coverage. For example, individuals cannot be enrolled in Medicare, which generally occurs at age 65, and must not be able to be claimed as a dependent on another person's tax return. Individual family members may have their own HSAs, provided they each meet the eligibility rules. Unlike flexible savings accounts, HSA funds are not subject to a "use it or lose it" policy. Money not spent one year carries over to the next. HSA funds may be placed in investments approved for IRAs, such as bank accounts, certificates of deposit, stocks, bonds, annuities, and mutual funds.
A HDHP, to which HSAs are attached, is a health plan with a minimum deductible in 2012 of at least $1,200 for individuals and $2,400 for family coverage. Annual out-of-pocket expenses cannot exceed $6,050 for individuals and $12,100 for family coverage. Two types of contributions may be made to HSAs: regular and catch-up. The annual contribution limit for an HSA for individual coverage is $3,100 (in 2012). The annual limit for family coverage is $6,250. For individuals between 55 and 64, an additional "catch-up" contribution of $1,000 to an HSA is allowed. All of the amounts listed above are adjusted annually for inflation.
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