Health Savings Accounts (HSAs) - HSA Plans
Health Savings Accounts or HSAs are a new and innovative way to insure for day-to-day medical expenses while saving for the future.
Like an IRA or a 401k, an HSA is a tax-deductible, retirement savings account. However, an advantage to a Health Savings Account is that the money within the account can be used at any time to pay for a wide variety of qualified health expenses without being subject to federal income taxes or penalties.
The key components of Health Savings Accounts are:
- The money you contribute to your HSA health insurance plan is deductible from your federal income taxes and most states' income taxes.
- Money within your HSA insurance plan rolls over each year and will grow as you continue to contribute to the health savings account.
- At any time you may withdraw funds tax-free provided the money is used to pay for qualified health expenses.
- At age 65 and older you can withdraw money from your HSA for any reason without incurring a tax penalty.
The HSA approach to health insurance is one in which you combine an HSA-qualified, high deductible health plan with a Health Savings Account. The HSA health insurance itself provides you with the advantages of receiving the insurance carrier’s contracted rates for all in-network services incurred prior to reaching the deductible. After the deductible has been met, the insurance coverage is as comprehensive as any traditional health insurance plan.
Prior to HSAs the Federal government had created a pilot program called Medical Savings Accounts (MSA). These were discontinued December 31, 2005.
In 2003, Health Savings Account legislation was included in the Medicare Prescription Drug, Improvement, and Modernization Act; and on January 1, 2004 financial institutions began offering HSAs. The legislation permits any individual who meets certain eligibility requirements to open and fund an HSA.
An HSA can be opened at any financial institution that offers them. The list of health savings account administrators includes banks, credit unions, and other financial services companies. The eligibility requirements for opening and funding a Health Savings Account are simple: You must be enrolled in an HSA-qualified health insurance plan; you cannot be enrolled in another health insurance plan that includes first-dollar coverage; you cannot be enrolled in Medicare; and, you cannot be claimed as a dependent on someone else’s tax return.
For as long as you meet these requirements you are allowed to fund your Health Savings Account. The amount of money you can put into your HSA is indexed each year to keep up with inflation. For instance, in 2009 the HSA contribution limits were $3,000 for individuals and $5,950 for families. For 2010, they have increased to $3,050 for individuals and $6,150 for families.
Also, individuals between the age of 55 and 65 are allowed to make an additional “catch-up” contribution. For 2010 and beyond the catch-up contribution is $1,000.
Whatever money is still in your HSA at the end of the year simply rolls-over and can be added to with the following year’s contribution. In this way Health Savings Accounts differ from Flexible Spending Accounts or FSAs. More people are familiar with FSAs and those that have them are aware of the account’s use-it-or-lose-it clause. HSAs do not have this particular requirement. You have the discretion of when you use the money and any balance remaining in the account at the end of the year remains. In this way HSAs have the potential of growing into a nice retirement account.
One of the most appealing aspects of a Health Savings Account is their tax treatment. The money you deposit within your Health Savings Account can be deducted from your Federal Income Taxes and from most state’s income taxes. The manner in which you deduct it from your taxes is referred to as an “off-the-top deduction,” meaning you deduct it from your gross income and then do your taxes.
Once you have opened your Health Savings Account you are allowed to use the tax-free money to pay for a wide variety of qualified expenses without receiving any tax or penalty. These qualified health expenses are not only medical expenses, but also include a wide array of health related costs such as dental, vision, orthodontia, and chiropractic expenses. For the most comprehensive list of HSA qualified expenses refer to the IRS’s Publication 502.
You can continue to use the money within your Health Savings Account to pay for these qualified expenses for as long as the funds are available. If, however, you use some of the money for non-qualified expenses and you are under 65 years of age, then that amount will be taxed at your income tax rate and you will receive an additional 10% tax penalty. Following age 65 the money used for non-qualified expenses will still be taxed at your income tax rate but you will not receive any tax penalty.
While there are many advantages to the HSA approach to health insurance, some of the key ones are:
- You own your Health Savings Account and you control it.
- The money deposited in the account is tax deductible.
- The balance in your HSA can continue to grow each year as you contribute to the account.
- The money can be used for a wide variety of health expenses without ever being taxed.
- After age 65 you can withdraw the funds from the account for non-qualified expenses without penalty.
The steps are simple: 1) Enroll in an HSA health insurance plan; 2) open a Health Savings Account with an HSA administrator of your choice; and, 3) begin saving for current and future health expenses.