First Person: 5 Questions About Health Savings Accounts

I get a lot of questions from my clients about Health Savings Accounts. These are becoming more popular every year, but can be confusing to those who have little or no experience with them. Here are the top five questions and my standard answers.

What IS a Health Savings Account?

A Health Savings Account, or HSA is an account set up with pre-tax deductions from your paycheck. The money sits in your account until you need it for qualified medical expenses. This fund is a great way to save on taxes and medical expenses. However, in some cases, if you don't use the funds by the end of the calendar year, you lose them. Some plans will let you roll the contributions over to the next year.

What are the contribution limits for HSAs?

The contribution limits for 2010 were $3,050 for an individual, and $6,150 for a person with a family. These limits remain unchanged for the 2011 calendar year. This means that you can contribute up to the maximum amount into your HSA, and it will be untaxed. As stated above, if you don't use your contributions by the end of the calendar year, they are lost. Therefore, you should plan ahead and estimate what you will need for medical expenses, and don't contribute more than that.

How do I contribute to an HSA?

Contact the administrator of your current health insurance plan and inquire about setting up an HSA. You may also be able to do this through your employer or your investment professional. Different HSA providers offer different benefits and different fee schedules, so shop around before you commit to one.

When and how can I withdraw funds from my HSA?

You can withdraw funds from your HSA at any time. However, ONLY those withdrawals that are used for qualified medical expenses are exempt from taxes, so be careful what you spend your withdrawals on. To make a withdrawal, simply contact the administrator of your HSA. Withdrawals usually do not involve prior authorization or completion of a form. You may be required to pay medical expenses out-of-pocket and then be reimbursed by the plan administrator. Other HSAs will come with a debit card or checks for withdrawals, which you use just like a regular bank account to pay for medical expenses. Simple!

What happens to my HSA if I die?

If you pass away, your HSA will go to your heirs as designated in your will. If you die intestate (without a will), your HSA will pass to your heirs as determined by the laws in the state you resided in at the time of your death. If the HSA passes to your spouse, it becomes their HSA. If it passes to any other heir, it becomes a regular investment account and tax-free benefits cease as of the date of your death.

As with any investment, always seek the advice of a qualified, licensed investment professional. They can tailor a plan to fit your budget and your lifestyle.

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