Kelly Bullis: Not covered? My health savings account says not so fast

I love getting notices from my health insurance that say, "Not covered." (I used to hate it.) Now, I jump for joy when the fine print says, "Yes, you have medical insurance, except for..."

What? Is my elevator not making it to the top floor? Am I one brick short of a full load?

Actually, I'm fine. I'm covered. I have an HSA! When I need to order contact lenses (over $400) and my insurance doesn't cover it, I whip out my HSA debit card and, Wham! It's paid for. When my son needs his wisdom teeth pulled and my insurance doesn't cover it, I smile and hand the dentist my HSA debit card and, Bam! It's paid for.

So, what is an HSA? Passed by Congress in 2003, it's a health savings account, owned by you. It requires that your medical insurance be a high deductible plan - at least $1,150 for singles; $2,300 for married. You get to keep the money you don't spend each year and let it grow, like a Roth IRA. Only catch is any withdrawals - which are tax free - must be for IRS-defined allowable medical expenses.

You get a deduction from your taxable income for contributions you make each year (up to $3,000 for singles, $5,950 for married; an extra $1,000 if you're over 55. Indexed each year for inflation.) You and your employer can both contribute to your HSA account.

How does an HSA work? It's like a Roth IRA in that the contributions enter the plan and grow tax free. There is a maximum out-of-pocket expense limitation per year: $5,800 for singles, $11,600 for married. Contributions are deductible on your tax return, whether you itemize or not. Withdrawals for medical expenses are not taxable. Treat it just like a separate checking account - you can write checks or use a debit card. Many also have online banking services too.

Who is eligible? You must have a high-deductible health plan (HDHP). You must be under 65 years old and not enrolled in Medicare. You can not be claimed as a dependent on somebody else's return.

Planning tool. Some of our clients are maxing out their HSA contributions and then consequently getting the deduction on their return, but not using it for normal medical expenses, instead letting it grow (tax free) into a large balance to tap into for anticipated medical expenses when they are older. That way, they don't need to use their IRA funds (and consequently pay tax on the IRA withdrawal) to pay medical bills, which are usually the large unknown in a retired person's monthly budget.

For more information, talk to your health insurance agent, your bank, and your CPA.

• Kelly Bullis is a certified public accountant with over 30 years of experience. Contact him at 882-4459.