Health Savings Account Answers

Money in y our flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you ca n open a flexible-spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy.

Legislation passed by Congres December 9, 2006, will let you make a one-time transfer of funds tax free fro m a flexible-spending account to an HSA. Changes to the law also will allow individuals to make a one-time tax-free direct transfer of funds from an IRA to an HSA (up to the HSA annual contribution limit).

If my employer offers both, can I fund my flexible spending plan, too?

No. You cannot have an HSA if you use a flexible-s pending account to pay health-care costs or if you have other medical coverage (say, through a spouse's policy). However, if your fl ex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA, too.

If I set up HSA through my employer, what happens if I switch jobs?

You can keep the mone y in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% penalty -- plus an income- tax bill -- if you use any of the money for nonmedical expenses before age 65.

What happens if I want to withdraw the money for nonmedical expenses after age 65?

You won't be hit with the 10% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.

Can a couple who is planning to retire early open an HSA?

Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $700 in 2006 if you're 55 or older; in 2007 it's $800. This catch-up contribution amount will increase by $100 per year until it reaches $1,000 in 2009.

Yo u can't make new HSA contributions after age 65, but you can still use the money in your account tax-free for medical expenses at an y age. You'll owe income taxes on the money -- but no penalty -- if you withdraw the money for nonmedical expenses after age 65.

Do contributions to an HSA in any way affect one's ability to contribute to an individual retirement account ?

No. Your HSA contributions won't affect your IRA limits -- $4,000 per year or $4,500 for those over 50. It's just anothe r tax-deferred way to save for retirement.