How to Open a Health Savings Account (HSA)

Difficulty: Moderately Easy

Instructions

Things You'll Need:

High deductible health insurance plan

Step 1

A Health Savings Account, also called an HSA, is simply a special checking or savings account that you set up to use for paying your qualified medical bills. They are governed by fairly strict rules but the rules are actually quite easy to follow.
Step 2

There are several benefits to health savings accounts. Foremost, the HSA can result in tax savings. Health savings account contributions (amounts that you deposit to the account) are deductible "above the line" on your Federal tax return, meaning that you can deduct the contributions whether or not you are able to claim itemized deductions. See steps below for limitations on amounts that can be contributed.
Step 3

A Health Savings Account is especially beneficial if you tend to have low medical bills. (One clue would be that you never have enough medical expenses to be able to itemize them on Schedule A) The premiums for the required high deductible health insurance plans are usually dramatically lower than for a standard plan. Often, the premium savings is enough to fully fund the HSA account. If you have few medical expenses, you will have money left over in the account every year. Let the account build up tax-free for future medical expenses or to use after retirement!
Step 4

Another benefit of the HSA is that it can be a part of your retirement planning. You can use it as a kind of health savings retirement account. Simply leave the money in the account and use it tax-free to pay qualified medical bills in later years. You can also wait until after retirement and withdraw the money for any purpose although unless it is used for qualified medical expenses, the withdrawals will be taxable. (Note that withdrawals for non-medical expenses before retirement age will be subject to both income tax plus a 10% penalty)
Step 5

The first step, then is to determine if you are eligible to have a health savings account. There are four conditions that you must meet:
Step 6

A HDHP plan is required

1) You must have a health insurance plan that has a high deductible, called a High Deductible Health Plan (HDHP). This plan must meet the guidelines for both the deductible amount and the maximum out-of-pocket amount. For 2009 the minimum deductible is $1,150 (single) or $5,800 (family). The 2009 maximum out-of-pocket amount is $2,300 (single) or $11,600 (family). (Your insurance company should be able to tell you if your plan qualifies.)
Step 7

2) You cannot be covered by any other health insurance plan other than the High Deductible Health insurance Plan.
Step 8

3) You cannot be covered by Medicare.
Step 9

4) You cannot be claimed as a dependent on someone else's tax return.
Step 10

So if you have determined that you qualify for a Health Savings Account, then next step is to select the participating bank, credit union, or savings and loan company to maintain your account. Your health insurance provider may also have options, but you should not be obligated to use their bank. Compare rates, fees, and services first. Select by comparing interest rates on your earnings, monthly service fees and any per transaction fees, and whether you will need to use a debit card or a check to withdraw funds.
Step 11

Now, make your contributions. For 2009, the maximum contribution is $3,000 (single) and $5,950 (family). If you were not covered by a high deductible health plan for the entire year, then you must pro-rate the maximum, based on the number of months of coverage. If you are 55 or over, you may contribute up to an additional $1,000.00.
Step 12

Note that deposits may be made up to April 15th for the prior year. For example, you may make 2008 contributions through April 15, 2009. Keep a record of the amounts and dates of your deposits and which year they are to be credited. You will need this information to prepare your tax return.
Step 13

You may also roll over certain funds into your HSA - see IRS Publication 969 for more information.
Step 14

Now, reimburse or direct pay your medical expenses from this account. Be very careful that you use the funds only for qualified medical expenses for yourself, (and possibly your spouse, and your dependents.) Qualified medical expenses in general treat a specific, non-cosmetic condition. Use IRC section 213(d), Publication 969, and Publication 502 as a guideline. This may include prescription drugs, doctor visits, hospital stays, lab tests, and medical equipment. In addition, the HSA allows reimbursement for qualified over the counter items. Most large chain drugstores and many other retailers now flag their eligible items on the cash register receipt. Please note that the premiums for your HDHP are not qualified medical expenses for HSA reimbursement purposes. Certain types of health insurance, such as long term care premiums, may be eligible. Refer to Publication 969.
Step 15

Save your receipts!

Save your receipts - you must be able to prove that you used the money only for qualified medical expenses. Otherwise you will be subject to a 10% penalty plus income tax on the amounts you withdrew from the HSA.
Step 16

Report on your tax return

Finally, report the health savings account activity on your tax return. You will receive Form 5498-SA which shows the amount of your contributions, but note that this will probably not arrive until after May 15th. You will also receive Form 1099-SA which reports the amount of distributions from your HSA. Report both of these figures on tax Form 8889 and attach it to your Form 1040. For 2008, the contributions are reported and deducted on Line 25 of the Form 1040. The amount that was distributed and used to pay for medical expenses is used only on Form 8889 to verify that the amounts were used for qualified medical expenses. The qualified withdrawals are not taxable. Note you may NOT deduct medical expenses paid with HSA funds on your Schedule A.
Step 17

You are financially savvy!

You made it through all the steps! (I know, there were a lot of them!) Congratulations - consider yourself financially savvy about HSAs. A Health Savings Account is quite easy to use once you get through determining whether it is right for you and getting the account set up. Review Publication 969, discuss this with your financial planner or CPA, and then consider yourself ready to make a decision regarding whether a health savings account is the right financial move for you.