The Basics on HSAs

• IRS Publication 969 provides information on Health Savings Accounts.paperwork 3 image by chrisharvey from Fotolia.com
  
  To qualify for an HSA, a person must be enrolled in a high-deductible insurance plan. Such plans, which offer lower premiums than traditional health insurance, feature higher out-of-pocket costs. While out-of-pocket costs are capped under regulations, families may pay as much as $11,600 per year before health insurance begins covering medical expenses. To cover the gap, workers may set aside a portion of their wages on a pre-tax basis.
  
  

Potential

• Investors using HSA funds to play the stock market should make sure they can quickly be converted to cash for medical emergencies.stock market analysis screenshot image by .shock from Fotolia.com
  
  HSA accounts carry over from year to year, and some can be invested in the stock market or mutual funds, depending on the plan design. In theory, healthy workers who incur smaller medical expenses may be able to save enough to cover the large deductibles in a few years. Policy makers hope that by forcing workers to pay for their own medical expenses, workers will "shop around" and slow the rate of growth in health care costs. Older workers or those with chronic conditions may find HSA and high-deductible plans don't fit their needs.
  
  

Considerations

• Acupuncture is a qualified medical expense, as are ambulance rides, according to the IRS.Needles in Stomach During Acupuncture Appointment image by nextrecord from Fotolia.com
  
  HSA funds can only be used for qualified medical expenses. These expenses are described in IRS Publication 502, which deals with medical expenses that are also tax deductible. Under the IRS rules, taxpayers can deduct medical expenses when the expenses exceed 7.5 percent of a person's adjusted gross income. HSA funds can be spent without regard to a person's adjusted gross income.
  
  

Warning

• Withdrawing money from an HSA can lead to stiff penalties.money money image by Valentin Mosichev from Fotolia.com
  
  Diverting money to an HSA is done on a pre-tax basis. It reduces income, and thus a person's tax burden. Additionally, interest and investment earnings are not taxed. When money is withdrawn from an HSA and used for items that are not qualified medical expenses--a new car, for instance--the funds are subject to taxation at the taxpayer's normal rate, plus an additional 10 percent penalty in 2010 and 20 percent in 2011.
  
  

Special Rules

• If you have questions, consider hiring an accountant.tax forms image by Chad McDermott from Fotolia.com
  
  There are rules that further restrict spending on insurance premiums. According to the IRS, "The premiums for long-term care insurance that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually." HSA funds spent while receiving unemployment compensation or while paying for continuing insurance may by done so on behalf of a spouse. But if the account holder is not 65, "Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses."