In December 2003, Congress passed the medicare reform law which included a provision for the creation of tax-favored health savings accounts (HSAs) for Americans too young for medicare. HSAs are a new option for health insurance and they have two parts. The first part is a health insurance policy that covers large hospital bills. The second part of the HSA is an investment account or retirement account from which you can withdraw money tax-free for medical care and expenses. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.

To be eligible for an HSA, an individual must be covered by a High Deductible Health Plan (HDHP), must not be covered by other health insurance (does not apply to specific injury insurance and accident, disability, dental care, vision care, long-term care), is not eligible for Medicare, and can't be claimed as a dependent on someone else's tax return. A HDHP is a health insurance plan with a minimum deductible of $1,000 (self-only coverage) or $2,000 (family coverage). The annual out-of-pocket (including deductibles and co-pays) cannot exceed $5,000 (self-only coverage) or $10,000 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and higher out-of-pocket (copays & coinsurance) for non-network services.

The annual limit on your tax-deductible contribution to the savings account is the amount of the deductible you have to pay before benefits kick in - up to $2,650 for singles and $5,250 for families in 2005. If you were born before 1950, you can put in an extra $500 per year.

In general, you can spend tax-free from your HSA on all medical, dental (including braces for your children), and vision expenses, chiropractic visits, and even acupuncture, but not on your insurance premium, unless you are unemployed and are collecting Federal unemployment benefits and then you can use the HSA funds to pay for medical insurance. For those with questions, there is list of allowable expenses published by the U.S. Treasury Department, actually the Internal Revenue Service, referred generally as the ‘213 (d)' list, since it appears in IRS regulation 213 (d). Here is a link to the list of allowable/not allowable expenditures: http://www.irs.gov/pub/irs-pdf/p502.pdf.

For more information, you can learn more about the basics as well as companies that offer HSA plans at the HSA Insider, HSA Decisions or review our FAQ.