HSAs: The ABCs of health savings accounts

Correction appended.

It's Only Money spent a lot of time last week

. It's Their Money

that might cut their health insurance costs considerably when Oregon's health-insurance exchange opens in 2014. They also could benefit from a high-deductible health plan with an accompanying health savings account.

What are HSAs? Well, It's Only Money will delve into them this weekend. They're easily confused with FSAs and HRAs, but there are significant differences. They are becoming more common in workplace benefit offerings, and they'll be found in the individual exchange, called

. If used carefully, they could serve as a handy retirement savings tool.

First, here are the ABCs of HSAs.

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What are they?

Savings accounts to help you cover the costs of high-deductible health plans and retirement health expenses.

Who provides them?

Banks, insurers and brokerages that offer IRAs.


What is a high-deductible health plan?

Insurance with deductibles of at least $1,250 for singles and $2,500 for families. The plan must limit the amount spent on deductibles and out-of-pocket expenses to $6,250 a year for singles and $12,500 for families. That limit only applies for in-network services; out-of-network costs don't count toward that maximum.

How much can I contribute?

For 2013, up to $3,250 for singles and $6,450 for families. The IRS adjusts those limits annually. Once you turn 55, you can contribute an additional $1,000.


How is that deductible?

Your employer can deduct it from your paycheck before taxing it or you can deduct the contributions on your tax form -- or a combination. The deduction is taken on page one of

. You need not itemize HSA deductions on Schedule A. But you will have to file

showing the amount you contributed, any employer contributions and any withdrawals. Your employer's contribution will be shown on your W-2.

Do I lose the money if I don't spend it in a year?

No. That's an employer-established Flexible Spending Account, or FSA. You can accumulate HSA money until death.

What are the tax benefits?

They're threefold. You can make pre-tax contributions through your employer or deduct them on your tax return. The contributions can grow in investments or earn interest tax free. And money can be withdrawn without being taxed, so long as it's spent on qualified medical expenses.

What medical expenses qualify?

Generally speaking, that's anything a doctor would order or prescribe (

has a list). But it also includes legal abortions, acupuncture, teeth cleanings, dentures, in vitro fertilization, pregnancy test kits and lodging for out-of-town medical care.

However, HSAs can also be used to pay for long-term care premiums, health-insurance premiums while you or your spouse are unemployed, COBRA health insurance premiums and Medicare premiums. They can also be used to pay for your spouse's or dependent's expenses, regardless of their coverage, said

, director of HSA Benefits Consulting. You can even use it on expenses for relatives who rely on you for most of their financial support.


What if I spend the money on other things?

You'll be taxed on the withdrawal and possibly pay an extra tax of 20 percent on the amount withdrawn.


Can I avoid that extra 20 percent tax?

Yes, once you turn 65, become disabled or die, the 20 percent penalty doesn't apply.

Check back here tomorrow for more about

. Also,

has more.

This post has been edited to reflect the following correction:

HSA money can be used tax-free to pay for a spouse's or dependent's qualified medical expenses, regardless of their health coverage. However, HSA distributions aren't tax-free if they're made for expenses reimbursed by another health plan.

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