HSAs (health savings accounts) are a useful tax benefit in this day and age of increasing medical insurance premium costs. As with most insurance coverages, a higher deductible allows for lower premium charges. However, the higher deductible leaves the insured with higher out-of-pocket medical costs.
To assist taxpayers with paying for the portion of their medical costs that they have to pay for themselves due to a large deductible, the Code allows for a taxpayer to establish an HSA. The taxpayer (or his or her employer) can contribute amounts to the HSA without being subject to income tax on the contributed amounts. The earnings on HSA balances are also not taxed, and expenditures from the account for health and medical items do not result in income tax on the deferred income.
So that taxpayers don’t misuse the HSA and shelter too much income, there are annual limits for contributions. The 2010 limits have now been increased. For 2010, the individual contribution limit is $3,050 (up from $3,000). For family coverage limits, the limit in 2010 will be $6,150 (up form $5,950).
Only taxpayers who participate in “high deductible” medical insurance plans can have an HSA.