Changes Coming for Health Savings Accounts

by Team Dinks on April 21, 2010 · 2 comments

Piggy Bank
If you have a Health Savings Account (HSA), you might be wondering what changes are coming down the pipe due to health care reform. But first, let’s backup and review what an HSA is in the first place.

What’s a Heath Savings Account?

An HSA is a tax-exempt account you can open to pay (or reimburse yourself) for certain medical expenses. You’re eligible to have an HSA if you meet these requirements:

  • You’re covered by a high deductible health plan (HDHP) and have no other general health care coverage
  • You’re not enrolled in Medicare
  • You can’t be claimed as someone’s dependent on their tax return

What Are the Benefits of a Health Savings Account?

Here are nine reasons why I’m always the first to tell people how much I love my HSA:

  1. You get a tax deduction for money you put in the account – even if you don’t itemize deductions on your tax return.
  2. Interest you earn on the account grows tax free.
  3. Money you withdraw to pay for qualified medical expenses is tax free.
  4. There’s no deadline to spend the money – balances rollover from year to year.
  5. You can do a tax-free rollover from an IRA (Individual Retirement Arrangement) to fund an HSA once during your lifetime.
  6. For 2010 you can contribute up to $3,050 if your HDHP covers just you. If it also covers a spouse or dependents, you can contribute up to $6,150. If you’re age 55 or older, add $1,000 to both those limits.
  7. After age 65, funds that remain in the account can be use for non-medical expenses without penalty, similar to a traditional retirement account.
  8. You own and control the account – not an employer.
  9. They usually come with a debit card and checks, which makes paying for qualified expenses very easy.

Changes Heath Care Reform Will Make to Heath Savings Accounts

I used to be able to say that my HSA money could even be used to pay for over-the-counter medications – such as cough syrup, aspirin, bandages, and Neosporin – on a tax-free basis. But according to the new health care legislation, beginning in 2011 the only medications you’ll be able to purchase with HSA funds are prescription drugs and insulin.

Another change that’s coming next year is the penalty for spending HSA money on something that isn’t allowed – that’s called a nonqualified distribution. Right now the penalty is 10% plus ordinary income tax on the amount. If you slip up and use HSA funds for a nonqualified distribution in 2011, the penalty will be doubled to 20% plus ordinary income tax.

Where to Find the Best Health Savings Accounts

So, where can you find a Health Savings Account that earns the highest rate of return? Interest rates depend on where you live and how much you have in the account (higher balances earn more). Credit unions tend to have some of the most competitive HSA rates – so if you belong to one, check there first.

Here are some of the best HSAs that I’ve found:

  • American Chartered Bank offers up to 1% APY (annual percentage yield) with no fees.
  • offers up to 2% APY with monthly fees of $2.25.
  • Bank of America offers up to 1.5% APY with monthly fees of $4.50.
  • State Farm Bank offers up to 1.39% APY with annual fees of $25

Where to Find a High Deductible Health Plan

Even though health care reform will reduce the overall tax break you get from an HSA, it will still be a great benefit. If you have a high deductible health plan or are considering getting one to lower your insurance costs, don’t miss out on also having an HSA. You can shop for a high deductible health plan at sites like and

Laura Adams is the author of Money Girl’s 10 Steps to a Debt Free Life. It’s available as an audiobook at or as a short e-book in the Amazon Kindle Store, the Sony Reader Store, and the Fictionwise E-bookstore. Learn how easy it is to get out of debt and stay out of debt for good. Take control of your finances today and create a more secure future.

(Photo by Alan Cleaver)

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{ 2 comments… read them below or add one }

1 Guy G. April 21, 2010 at 10:53 pm

I just wanted to say thanks for the info on the HSA's. My boss uses one and I never really understood how they work in detail. For someone like him though, with three children and a spouse, does it really make sense to contribute to one with no other form of health care plan (other than the Ontario Health Insurance Plan for every resident of Ontario)?
I feel he'd get more bang for his buck with a regular medical plan that pays for his kids' braces, et al.

Anyway, thanks for sharing,

2 Laura Adams April 22, 2010 at 7:02 am

Guy, I'm not familiar with the ins and outs of Canadian health plans. But for anyone with a qualified high deductible health plan, once they hit the deductible, they have $0 out of pocket expenses for the year. So someone with kids and lots of medical expenses actually has the potential to benefit the most! When you pay for braces using HSA funds, for example, you're paying for them with tax-free money.

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