How do health savings accounts work?

Health savings accounts (HSAs) are private individual accounts that allow consumers to save for medical expenses by contributing money to a tax-shielded account. Money in an HSA usually is used to pay for expenses that health insurance doesn’t cover.

Who qualifies for HSAs?

Your eligibility will be determined by a variety of factors. To get an HSA, you cannot be eligible for Medicare and cannot be a dependent on someone else’s tax return, and your health insurance plan must be a high-deductible plan — with a minimum deductible of $1,200 (for individuals) or $2,400 (for a family plan), according to Wells Fargo.

What are some benefits of an HSA?

• You own your HSA, and you can choose how much to contribute and when — as well as when and how to pay for medical expenses from that account.
• An HSA lets you set funds aside to pay for things such as deductibles and unexpected medical costs.
• You can deduct HSA contributions on your income tax return. If you accrue money in your account, it grows tax-free.
• Pairing your HSA with a high-deductible health insurance plan can lower your premiums. You then can use the HSA to cover your higher out-of-pocket costs and often save significantly.

Will I be charged fees for setting up an HSA?

The institution that administers your HSA may require a setup fee as well as monthly maintenance and check fees. Different administrators charge different fees.

What’s the maximum that I can contribute?

The maximum contribution for an individual is $3,050 for the 2011 tax year, according to the IRS. Families can contribute up to $6,150.

You are not required to contribute the maximum each year, but some HSAs will penalize you if you don’t make a small contribution every month. Those over age 55 can make extra catch-up contributions in addition to the maximum contribution, if they’re not enrolled in Medicare. For the 2011 tax year, that amount is $1,000.

What kinds of services can I use my HSA for?

Qualified medical expenses will vary depending on your plan. In general, you can use HSAs to pay for things like long-term care, psychiatric treatment, dental services, prescriptions drugs, co-payments, vision care (such as corrective surgery), deductibles for your health insurance plan and medical transportation.

Generally, you can’t use your HSA to pay your premiums. But if you are on unemployment, your HSA money can be used to pay insurance premiums, according to the U.S. Department of the Treasury.

How will health care reform affect HSAs?

As of 2011, you must get a prescription if you want to use your HSA money for over-the-counter drugs. Also, the penalty for using your HSA for non-qualified expenses increased in 2011 from 10 percent to 20 percent — meaning it’s more important than ever that you use your HSA for strictly qualified purposes.