Five lesser-known rules of health savings accounts

  1. If a distribution from your HSA is used for purposes other than a qualified health care expense as defined in IRS Publication 502, then the amount withdrawn is subject to both income tax and a 10 percent penalty, unless the person who makes such a withdrawal from their HSA is over the age of 65. If 65 years old or older, the amount withdrawn for non- medical purposes is treated as retirement income.
  2. Withdrawals that were made for what the HSA owner thought were qualified medical expenditures, but turned out not to be qualified medical expenditures, can be returned to the HSA if there is clear and convincing evidence that the expenditure was a mistake of fact. Such repayment to the HSA must be made on or before April 15th of the year following when the individual knew, or should have known, the expenditure was a mistake.
  3. HSA funds cannot be used to pay for health insurance premiums unless the individual is receiving federal or state unemployment benefits.
  4. You may use funds from your HSA to reimburse expenses from a previous year, but only if you had an HSA at the time the expenses were incurred.
  5. An individual will inherit all remaining HSA funds upon their spouse's death, unless stated otherwise in legal documentation. Should the HSA owner have no spouse, the funds in the account shall no longer be treated as an HSA but part of the individual's estate and will be subject to estate taxes.

Qualified expenses for long-term care insurance
 In order to spend money from your HSA on long-term care, your long-term care insurance contract must:

  1. Be guaranteed renewable;
  2. Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;
  3. Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract, must be used only to reduce future premiums or increase future benefits;
  4. Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.

The amount of qualified long-term care premiums that can be paid from an HSA is limited. Beginning in 2006, the amounts below can be included as a qualified medical expense. These amounts may be adjusted annually for inflation. 2008 allowable long-term care premium amounts:

  • Age 40 or Under: Up to $290
  • Age 41 to 50: Up to $550
  • Age 51 to 60: Up to $1,110
  • Age 61 to 70: Up to $2,950
  • Age 71 or Over: Up to $3,680

Maximum contribution limits for 2008

  • Self-only coverage: $2,900
  • Family coverage: $5,800

The maximum amount you can contribute per year is indexed annually for inflation and excludes "catch-up" contributions for those 55 years and older. If you are 55 or older you may add an additional $900 to your maximum contribution for 2008.

Freedom HSA earns interest for you!
 Did you know you can earn interest on your HSA dollars through the Freedom HSA? If you carry $500-$2,999.99 in your account you earn 1.5 percent interest on your overall balance. If you have $3,000 or more in the account you earn 3 percent interest.