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HSA Contribution Limits: Health Savings Account Rules

Health Savings Accounts (HSAs) are a pretty nifty way to save money. In short, if you’re eligible, they allow you to use pre-tax money to pay for medical expenses. This is done in either of two ways:

  1. Through making (pre-tax) payroll deductions directly through your employer, or
  2. Through claiming an “above the line” deduction for the amount you contribute to your HSA.

HSA Contribution Limits

For 2010, HSA contribution limits are as follows:

  • $3,050 for a person with self-only coverage, or
  • $6,150 for family coverage.
  • Also, if you’re 55 or older, you’re allowed to make a catch-up contribution of $1,000.

Note: Any contributions made by your employer count toward the annual contribution limit, thereby reducing the contribution that you can make.

Contributions for each year can be made up until April 15 of the following year.

HSA Eligibility

In order to be eligible to make contributions to an HSA, you must be covered by a high-deductible health plan (HDHP) with an annual deductible of at least $1,200 ($2,400 if it’s family coverage). The plan must also have maximum out-of-pocket expenses of less than $5,950 ($11,900 if it’s family coverage).

Also, you must:

  • Not be enrolled in Medicare,
  • Not be claimed as a dependent on somebody else’s return, and
  • Not have other health care coverage (with a few exceptions).


Health Savings Accounts (HSAs) are often confused with Flexible Spending Accounts (FSAs). The primary difference between the two is that money contributed to an HSA rolls over to the following year if unused. In contrast, FSAs are “use it or lose it.” Any money left unspent in an FSA disappears at the end of the year.

The takeaway is that with an HSA you don’t have to play the game of guessing how much you’re going to face in medical expenses each year. For example, if your 2010 HSA contributions exceed your medical costs, that’s no problem. You’ll be able to use the remaining money from your 2010 contributions to pay medical costs in 2011 — or 2012, 2013, etc.

HSA Withdrawals

Money can be withdrawn from an HSA at any time, for any reason. However, unless the money is either a) spent on qualified medical expenses or b) used to reimburse you for qualified medical expenses, it will be subject to income taxes and a 10% penalty.

  • Exception: If you’re age 65 or over, or have become disabled, the 10% penalty is waived, though regular income taxes will still apply.

Qualified medical expenses include those that would qualify for the Medical and Dental Expenses deduction, as well as non-prescription medicines.

Update: Beginning in 2011, over-the-counter drugs will not be eligible unless you have a prescription.

Investing within an HSA

Funds within and HSA can be invested in much the same way as within an IRA (though your investment options will be limited to whatever the HSA administrator chooses to offer). Of course, at any given point, it’s likely you’ll be spending the money within your HSA in the near future, so it’s usually a good idea to keep it invested in something very low-risk.

Earnings and growth within an HSA are not taxable — though again, if you take money out for something other than qualifying medical expenses, the entire distribution is taxable and potentially subject to a 10% penalty.

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  1. This is an excellent description of my understanding of HSAs from before the health care reform. Do you have any idea how much of this is accurate now? I haven’t read a detailed analysis of what impact, if any, the new laws will have on existing or new HSAs.

  2. Good question, Mike.

    The only changes that I’ve heard of are that, beginning in 2011:

    • The penalty for nonqualifying distributions will increase from 10% to 20%, and
    • Non-prescription drugs (aside from insulin) will no longer be eligible.

    If anybody else is aware of other changes, please feel free to chime in.

  3. Hi Mike, Nice simple treatment of an important topic. The timing of the article is good because most “open enrollment periods” regarding employee benefits are coming up in the next few months, and that’s when many reevaluate their “benefits-related” activities. You’ve inspired me to further check out the HSA. Thanks, Barb

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