Payroll Deductions

• If your employer offers a high deductible health plan and a linked health savings account, you can make contributions to that plan through payroll deductions. The money you contribute to your health savings account is not taxed, so the amount you contribute lowers your taxable income and therefore your tax liability. In addition to the amount you contribute, your employer might contribute additional money on your behalf, making the plan even more valuable since those contributions are not considered taxable income as well.
  
  

Tax Deduction

• Even if you do not have the opportunity to contribute to an HSA through pre-tax payroll deductions, you can still contribute to a plan on your own. When you contribute to an HSA with your own money, you are paying with after-tax dollars. However, you do get a payroll deduction for the money you put in, and that can lower your taxable income and your taxes, just like an employer-based plan.
  
  

Contribution Limits

• A health savings account can be a very good deal, both from a premium standpoint and from a tax savings perspective. You can save money on your premiums by using a high deductible health plan instead of a more comprehensive one. And you can save money on your taxes by contributing to your HSA, either through payroll deductions or in lump sum payments to the plan administrator. The IRS does impose limits, however, on the amount you can contribute, and it is important to stay within those guidelines. For 2011 you can contribute up to $3,050 to a single HSA plan and up to $6,150 to a plan that covers your entire family. These contribution limits are reviewed each year and adjusted as necessary, based on a number of factors, including the rate of inflation. Always check the IRS website for current year limits before you invest.
  
  

Spending Restrictions

• Since you are allowed to put money in a health savings account tax-free, the IRS imposes restrictions on how you can spend that money. You can use the money in your health savings account to pay for legitimate medical expenses not reimbursed by your health insurance policy, including the cost of prescription drugs and the cost of medical care and doctor visits. You can also use your HSA funds to pay for eye exams, prescription eyeglasses and contact lenses, as long as those costs are not covered by another insurance plan. But as of Jan. 1, 2011, you cannot use your HSA money to pay for over-the-counter medications unless you first obtain a prescription from your doctor.