How to Open a Medical Savings Account

A medical savings account, also known as a health savings account (HSA), is a way to pay your medical bills with pretax money. Since President George W. Bush signed a law in 2004 allowing them, more than 5 million Americans have opened HSAs. Before 2004, medical savings accounts, called Archer MSAs, were only available for the self-employed or people who worked for small companies. The new law made health savings accounts available to a wider range of people, and old Archer MSAs were grandfathered into the program. With a medical savings account, you deposit tax-free money into a specially designated account to use for qualified medical expenses, such as physician and hospital services, dental and vision services and over-the-counter drugs.

Difficulty: Moderately Easy

Instructions

1. Determine if you are eligible for a health savings account. The plan is available to people under age 65 who have a qualified high-deductible policy. As of 2008, the IRS defined high deductibles as at least $1,150 for individuals or $2,300 for families. Yearly out-of-pocket medical expenses cannot be more than $5,800 for an individual or $11,600 for a family. This applies to policies paid for through an employer, as well as self-coverage.

2. Make sure you have no other health coverage, such as through a spouse's employer. The high-deductible policy must be your only health coverage. You also cannot be claimed as a dependent by someone else for tax purposes, and you cannot be enrolled in Medicare.

3. Talk to the human resources manager at your work to see if you have an HSA-eligible option in your health insurance; if so, open your account through your office. Some companies fund all or part of HSAs. Alternately, some companies match employees' HSA contributions.

4. Open an HSA-eligible plan with a health insurance company if you are self-employed and provide your own coverage. Any company that sells health insurance in your state may offer HSAs. Contact your current insurance company or your state insurance department to get names of companies that offer HSAs.

5. Contribute to your new medical savings account. In 2008, individuals could contribute up to $2,900. Families could put up to $5,800 in the account. If you're getting your HSA through an employer, you can probably make pretax contributions. Even with an account you open on your own, you can deduct your contributions at tax time.

Tips & Warnings

• With a medical savings account, your account balance rolls over from year to year. This differs from a flexible-spending account, where you must use all your allotted health funds by the end of each year. If you set up your HSA through an employer and then change jobs, you can still keep your account.
• You can withdraw money out of your health savings account for purposes other than medical expenses, but you will be taxed on it. You'll also owe a 15 percent penalty.

Resources

• Department of the Treasury Information on HSAs