About a year and a half ago, it looked like health-savings accounts might be outlawed in the rush towards national health care. But with the Republicans now in control of the House of Representatives, HSAs no longer seem endangered. That's good because they are becoming more popular. According to the Employee Benefit Research Institute, there were 5.7 million HSAs and employer-sponsored health reimbursement arrangements in 2010, worth $7.7 billion. Those numbers are way up from 2006 when there were only 1.2 million accounts worth $835 million.

Since HSAs will hopefully be around for a long time, here's an update on how they work under the current rules.

Tax-Saving HSA Basics

If you are eligible, you can make annual tax-deductible HSA contributions. For 2011, the maximum contribution is generally $3,050 for self-only coverage or $6,150 for family coverage (anything other than self-only coverage). For 2012, the numbers increase to $3,100 and $6,250. The maximum contribution is $1,000 higher if you'll be 55 or older as of year-end. These same limits apply to high-income folks, so even billionaires can qualify for deductible HSA contributions.

In addition to the tax savings, you might save money on your health premiums because you must have high-deductible health plan (HDHP) coverage to be eligible for HSA contributions. Since HDHPs are less-generous than traditional plans, the coverage should be cheaper (at least in theory). Over many years, the cumulative savings from lower taxes and lower premiums could add up to big bucks.

What happens to the money in your HSA? Account earnings are allowed to build up free of federal-income tax. So if you and your family are in good health, contributions and earnings can accumulate over the years into a substantial medical expense reserve fund. Then you can take tax-free withdrawals to cover medical expenses for you, your spouse and your dependents.

Some HSA trustees allow account balances to be invested in mutual funds, so you're not necessarily limited to boring money-market-type investments. If your account still has a balance after you reach Medicare eligibility age (currently 65), you can drain it and use the money for any purpose. However, you'll owe federal income tax on withdrawals that are not used for medical expenses. Alternatively, you can keep your HSA open and take tax-free withdrawals to cover medical expenses incurred after reaching Medicare eligibility age.

High-Deductible Health Plan Is a Prerequisite

You must have HDHP coverage to be eligible for the HSA contribution privilege. For 2011 and 2012, an HDHP must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. For 2011, an HDHP cannot have an annual limit on total out-of-pocket costs in excess of $5,950 for self-only coverage or $11,900 for family coverage (for 2012, the numbers increase to $6,050 and $12,100).

No More Tax-Free Withdrawals for Non-Prescription Medicines

Before 2010, you could take tax-free HSA withdrawals to pay for non-prescription drugs like pain and allergy relief medications. Starting this year, tax-free withdrawals are only allowed for prescription drugs, insulin and doctor-prescribed over-the-counter medications.

Stiffer Penalty on Non-qualified Withdrawals

If you take money out of your HSA for any reason other than to cover medical expenses, you will owe federal income tax plus a 20% non-qualified withdrawal penalty. Before this year, the penalty was only 10%.

Contribution Rules for Married Couples

If both you and your spouse have separate self-only HDHP coverage, you can each contribute to $3,050 to separate HSAs for 2011 ($3,100 for 2012).

If one spouse has family HDHP coverage, both spouses are treated as having family coverage for HSA contribution purposes. So you and your spouse can together contribute up to $6,150 for 2011 ($6,250 for 2012). If one of you is 55 or older as of year-end, add $1,000 to the limit. Add $2,000 if both of you are 55 or older. You can contribute to one HSA, or you can contribute to separate accounts. If you choose to use separate accounts, the contribution limit is divided 50-50 unless you and your spouse agree on a different split. The same considerations apply if you and your spouse both have family HDHP coverage.

What to Do Step-By-Step

If you're interested in taking advantage of the HSA deal, here's what to do.

Step 1: Get qualifying HDHP coverage. Eligibility to make HSA contributions is generally determined on a monthly basis. So the earlier in the year you get HDHP coverage, the better. It's obviously getting late for this year, but you can make sure you have coverage in place for the beginning of next year.

Step 2: Set up your HSA as soon as you get HDHP coverage, because you can only take tax-free withdrawals to cover medical expenses incurred after the account has been established. To set up your account, find a willing trustee or custodian. Then fill out IRS Form 5305-B (Health Savings Trust Account) or Form 5305-C (Health Savings Custodial Account).

Step 3: Make a deductible contribution. You have until April 15 of the following year (adjusted for weekends and holidays) to make your contribution for the previous year (same as the deadline for IRA contributions). So you have until April 17, 2012, to make an HSA contribution for 2011.

Step 4: Fill out IRS Form 8889 to calculate your deductible HSA contribution amount, and claim your rightful deduction on page 1 of Form 1040. If you and your spouse have separate HSAs, you must fill out two separate forms.