Eligibility

• To open a health savings account, you need to have a qualified high deductible health plan. A high deductible health plan is a plan in which you pay a relatively low monthly premium--lower than the cost of more comprehensive coverage. The deductible is the amount you must pay before the insurance kicks in. For example, if your insurance plan has a $5,000 deductible, then you must pay the first $5,000 of medical expenses you incur in a year. After you have spent $5,000, the health insurer begins to cover your bills. When you open some high deductible health plans, you then qualify for a health savings account. As of 2010, the deductible must be at least $1,200 for individual coverage or $2,400 for family coverage.
  
  

Limitations

• When you open a health savings account as part of your high deductible health plan, you must open it with a qualified savings bank. Your medical insurer can usually refer you to a list of banks. The account must also be managed by a trustee, which means you can't just put money in and take it out whenever you want. A trustee oversees withdrawals. The trustee is generally appointed by the bank where you keep your health savings account or works with the insurance company.
  
  

Contributions

• You are permitted to contribute up to a set maximum amount into your health savings account each year. As of 2010, the maximum amount you can contribute is $3,500 if you are single or $6,150 if you have a health savings account that covers your family. These contributions can continue to build up in your account. So, if you contribute $3,500 one year and don't spend it, you can contribute $3,500 the next as well and have a total of $7,000 in the account after two years.
  
  

Spending

• Money from your health savings account can be used to pay for qualified medical expenses. Generally, any non-elective medical expenses can be paid for by proceeds from a health savings account. You should always keep your receipts for any deductions made from the savings account and any payments made, because the Internal Revenue Service (IRS) may audit your deductions from your health savings account to ensure they truly went for medical expenses.
  
  

Benefits

• You are able to save money tax-free for medical expenses. This allows you to be certain you have the money to pay your deductible. Also, this essentially reduces the cost of medical expenses since you are paying for them with pre-tax money. And by building up a savings account, you will be more protected from large expenses that may come your way.