A tax-advantaged personal savings account used in conjunction with a high deductible health policy. Individuals can contribute money to this account on a pre-tax basis to set aside money for qualified medical care and expenses, including annual deductibles and co-payments.
Health Savings Accounts (HSA's) are great news for Americans!
U.S. Congress has passed a new law, effective January 1, 2004, which provides broad access to Health Savings Accounts - HSA, which allows consumers to pay for qualified medical expenses with pre-tax dollars (income-tax free!) and save for retirement on a tax-deferred basis.
What is an HSA? A HSA is a tax-favored saving account that is used in conjunction with a high-deductible HSA-eligible health insurance plan to make healthcare more affordable and to save for retirement HSAs are similar to an IRA but with some additional advantages.
- Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65.
- Any HSA funds not used each year remain in the account, and earn interest tax-free to supplement medical expenses in the future.
- Like an IRA, the account belongs to you, not your employer. But unlike an IRA, your employer Can contribute to your HSA.
In order to have a Health Savings Account, you must get an HSA-Eigible Health Insurance Plan. This type of insurance plan is often referred to as a High Deductible Health Plan, and is typically less expensive than plans with lower deductibles.
A health insurance plan must meet the following criteria to be considered HSA-eligible:
- The health insurance plan must have an annual deductible of at least $1,000 for individuals and at least $2,000 for families.
- The sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than premiums) does not exceed $5,000 for individuals and $10,000 for families.
HSA's- Health Savings Accounts. What you need to know.
Here are some things you should know before you consider switching health plans to a Health Savings Account (HSA):
1. Health Savings Accounts can cut overall healthcare costs by about 30% over the long term for most people but they are not designed to reduce your immediate out-of-pocket expenses for a medical insurance plan. For example, if your family pays $500 per month for total medical and dental coverage right now, you should still plan to pay $500 per month in a new HSA plan. The only difference is that about half of this monthly cost will go directly into your own account and only about half will go to the health insurance company.
Over the long run, this should be much more cost effective for you, but it takes time (usually about a year) to build up enough reserve in your account to be fully secure with the higher deductible insurance policy that HSAs require.
2. Many people who apply for a Health Savings Account do not qualify. Those applicants who are most likely to save the most money and be approved for coverage are young, self-employed, and healthy with historically few medical expenses: Those over age 60 generally do not realize any savings.
3. HSAs reduce income taxes. The amount you deposit into your HSA account each year is deducted from your taxable income in the same way an IRA contributions do. Interest and investment earnings also grow tax-free.
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