Q&A: health savings accounts

A surprise in the Medicare-reform law passed last December was the creation of tax-favored health savings accounts, or HSAs, for Americans too young for Medicare. Since the law was passed, we've been bombarded with questions from readers. Here are the answers you're looking for.

Question: Who can have an HSA?

Answer: Almost anyone under age 65 who buys a qualified, high-deductible health-insurance policy and is not covered by other health insurance — you can still have other disability, dental, vision and long-term-care policies. The qualifier "almost" is necessary because people who are claimed as dependents on someone else's tax return cannot use an HSA.

Question: Does any high-deductible policy open the door to an HSA?

Answer: The policy must have a deductible of at least $1,000 for individuals or $2,000 for families. And annual out-of-pocket expenses for the deductible and co-payments can't exceed $5,000 for an individual or $10,000 for a family. If you already have a high-deductible policy, ask your insurer if it qualifies.

Question: How much can I contribute to an HSA?

Answer: The annual limit is the amount of the deductible you have to pay before benefits kick in — up to $2,600 for singles and $5,150 for families. If you were born before 1950, you can sock away an extra $500 a year.

Question: What are the tax breaks?

Answer: You can deduct HSA contributions, even if you don't itemize other deductions. Earnings inside the account grow tax-deferred, just as in an IRA, and withdrawals are tax-free at any time if you use the money to pay qualified medical expenses.

Question: What can I spend the money on?

Answer: The tax-free nod goes to most medical expenses, including doctors' fees, hospital charges, prescription and nonprescription drugs, vision and dental care, qualified long-term-care insurance premiums and Cobra premiums — to continue coverage under a group plan after you leave a job.

Money you don't spend continues to grow in the HSA for use in later years. There's no use-it-or-lose-it rule — such as that applying to flexible spending accounts.

There is a 10 percent penalty — plus a tax bill — if you use HSA money for nonmedical expenses before age 65. You'll pay taxes, but no penalty, for nonmedical withdrawals after that.

Question: Where can I open an HSA?