[2012 HSA Limits Update] The IRS has released 2012 HSA figures which have resulted in an increase to the contribution limit for an individual by $50 in 2012, from $3,050 to $3,100. The family contribution limit is also increasing from $6,150 to $6,250 (+$100).
The maximum annual out-of-pocket increased as well. The individual out of pocket maximum is going from $5,950 to $6,050. The family out of pocket maximum is increasing from $11,900 to $12,100.
The minimum deductible on an HSA qualified plan remained the same, $1,200 for individuals and $2,400 for families.
2012 Medical Spending Accounts (MSA) deductible amounts increased over the tax year 2011 amounts as follows:
Minimum annual deductible: Self-only/Family – $2,100/$4,200; (2011 – $2,000/$4,050)
Maximum annual deductible: Self-only/Family – $3,150/$6,300; (2011 – $3,000/$6,050)
Maximum annual out-of-pocket expenses: Self-only/Family – $4,200/$7,650; (2011 – $4,050/$7,400)
[How Health Savings Accounts Work] Over the years, Health Savings Accounts, or HSAs, have provided a great way for individuals and families to cover the cost of medical and health care expenses that would otherwise not have been covered by their health insurance plan.Essentially, Health Savings Accounts are tax advantaged medical savings accounts that you own. The funds that you contribute to an HSA are contributed on a pre-tax basis; that is they are not subject to federal taxes when you deposit them.
Similar to IRA accounts, you can contribute to your HSA account during any calendar year, through April 15th of the following calendar year. For 2010 and 2011, the IRS contribution limits to a HSA plan are $3,050 for a single individual and $6,150 for a family. If an individual account holder or the owner of a family HSA is age 55 or older, an additional “catch-up” contribution of $1,000 is also allowed.
These Health Savings Accounts, working in conjunction with a high deductible health insurance plans (HDHP), allowing the account holder to deposit and invest funds that can be withdrawn and used for any number of different health care related expenses. The minimum deductible in 2010 and 2011 for a HDHP is $1,200 for self-only coverage and $2,400 for family coverage. The 2011 maximum out-of-pocket limit (what you would have to pay) for HDHPs is $5,950/$11,900 for self/family coverage.
In addition, any funds in your Health Savings Account that are not used during the calendar year, can be rolled over into the following year. Therefore, if funds are not used and they continue to roll over, the balance in your HSA account can grow significantly over time. This is a key advantage over the standard Flexible spending accounts (FSA), where you have to spend your contributions in the year/period you make them or lose the funds forever. (See 2011 FSA limits)
How to Choose the Right HSA
Prior to opening your Health Savings Account, you must decide on your high deductible health care plan with a private health care provider or via your employer. But, before funding your HSA, it is important to do some research on the actual account you will be depositing your funds into. This is because not all Health Savings Accounts are alike.
First, there are many entities that offer accounts through which to fund your HSA. These include banks, credit unions, insurance companies, and other approved companies. And, similar to bank and brokerage accounts, there could be a wide array of different interest rates, fees, and requirements within your HSA account.
In addition, make sure that you read the small print to be aware of any possible hidden account fees or charges to liquidate funds. Also, know if there is a minimum balance required in your account, and if so, how much. Compare health insurance plan’s here and find the one that’s right for you.
Watch for Penalties
When you take distributions from your HSA to use for qualified medical expenses, these distributions are excludable from your taxable gross income. This is true even if you are not eligible to make contributions your HSA.
However, if you take any distributions from your Health Savings Account that are not considered qualified medical expenses, then these distributions are includable in your gross income. And, if you are under the age of 65, you will also be subject to an additional 10% tax as a penalty.
Changes to Health Savings Accounts with Health Care Reform
If you already have a Health Savings Account or will be opening one soon, there are some changes on the horizon due to the newly passed Health Care Reform provisions.
One such change includes the way in which reimbursable expenses are defined for Health Savings Accounts. For example, starting in 2011, only insulin and prescribed drugs will be considered reimbursable in your HSA. Therefore, over-the-counter medications such as aspirin and other more basic medical items will no longer be considered qualified expenses for Health Savings Accounts.
Another change to be aware of is the penalty for non-qualified distributions from your Health Savings Account. Currently, the penalty tax on non-qualified HSA distributions is 10%. However, with the new Health Care Reform, as of 2011, this penalty for non-qualified distributions will go from 10% to 20%.
Even with the upcoming changes, Health Savings Accounts provide a great way for individuals and families to pay medical expenses that are otherwise not covered. These expenses could include costs for preventive and wellness related programs that could potentially save you from future illnesses and other health related issues.
[Update - Sep 2010] — The Internal Revenue Service issued guidance reflecting statutory changes regarding the use of certain tax-favored arrangements, such as flexible spending arrangements (FSAs), to pay for over-the-counter medicines and drugs. Based on the recently approved health care reform package, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).