With health costs rising, and with frustration over ever-higher health insurance premiums, it is little surprise that many are looking for alternatives to the types of health insurance plans we are used to. In an effort to provide more options for paying for health care, the Health Savings Account was signed into law in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. It provides a way for consumers to set aside money for medical expenses, and provides a way for that money to grow tax free in an account that bears a striking resemblance to an IRA.
How a Health Savings Account Works
In order to open a Health Savings Account (HSA), you have to have a high-deductible health plan. This can be a plan through your employer, or a plan that you get on an individual basis. HSAs can be augmented with money from an employer, but it is important to note that you own your account, no matter who is contributing to it. All deposits in the account automatically become your property. Additionally, money rolls over year-to-year. This is an important distinction, since Flexible Spending Accounts (sometimes called cafeteria plans) are use-it-or-lose-it accounts that do not roll over. When you have a HSA, that money continues to grow.
Once it is established that you have a high-deductible health plan, and you open a HSA, you can begin contributing. There are contribution limits amounting to $3,050 for individuals and $6,150 for families in 2010. These limits are not subject to income. If you are over 55, you can make an additional “catch up” contribution of $1,000. This money is invested as you direct within the account. The money you contribute to a HSA grows, and yields a return, helping your account grow faster. You can withdraw money from the account to pay for qualified medical expenses, including dental, eye care, some health care products, co-pays, deductibles, specialist visits, prescriptions and more. (Note that starting in 2011, over the counter medication will no longer be considered a “qualified” expense.) As long as the money is used for qualified medical expenses — save your receipts — you will not be taxed on the earnings in your account.
The way you withdraw money from your HSA depends on the company administering the account. Check to see whether your account is accessed by debit card, specially issued checks, or a reimbursement process. You can actually withdraw money from a HSA for any purpose — even if it is not for health care expenses. However, you will incur a 10% penalty if you do not use the money for medical expenses. On top of that, the withdrawal is taxed as income if not used for health care expenses. Once you reach the age of 65, though, or are disabled, you can withdraw the money from your HSA for any reason without paying the 10% penalty. However, any non-medical withdrawals will be taxed as income (your withdrawals for health care expenses continue to be tax free).
You cannot roll your HSA into a 401k or IRA. You can do a one-time transfer of an IRA into a HSA, but that is all the rollover that is allowed. Make sure that you speak with a trusted financial professional or tax professional to learn the implications of this one-time rollover before you begin the process. In an HSA with money contributed through your employer, the money comes out pre-tax, lowering your adjusted gross income. If you do not have an employer, you contribute money with post-tax dollars, but you can then take an above the line deduction to lower your gross income on the front of your Form 1040.
Using Your HSA
In many cases, the HSA is of the greatest benefit if you are relatively healthy, and do not make a lot of trips to the doctor each year. You can save money by increasing your deductible and co-pays, so that you pay more out of pocket for your expenses, but your premiums are lower. On top of that, you can use the money from the HSA to cover your deductible, so if you save up enough before you have a major expense, it is possible to cover your higher deductible with relative ease. And, since you are putting money into a HSA that grows on your behalf through investments, you aren’t just sending that money to an insurance company. It benefits you, since you will have access to that money in later years if a medical catastrophe doesn’t wipe the account out. With insurance, if you never need the big payout, that money is lost to you. With a HSA, the money you put in is always yours, and you can withdraw it to help your cash flow later on.
What do you think of Health Savings Account Plans?
Here are a couple of places to look for and compare health insurance quotes:
Health Plans of America
Tim Gordon says
I learned a lot fro m this post. Actually, a friend of mine has this savings account but everytime I ask her what is it for, I don’t get a definite answer. Thanks for enlightening me on the topic.
We had a bad experience with our HSA. All our funds have been frozen since last year due to the company that processed the transactions filing bankruptcy. A couple of employees embezzled millions forcing them into bankruptcy. I am beginning to think we will never see any of our money from that account again. The account was FDIC insured but they won’t cover it because the actual bank where the money was held did not go under.
I just want to warn people that this could happen to their account.
Interesting. Shows that you really have to look into who is handling the accounts and how reputable they are.
Rhode Island Bankruptcy Lawyer says
HSA information was very helpful. As a Rhode Island bankruptcy lawyer, one of the biggest reasons I see people file bankruptcy is due to medical expenses. If more people would combine high deductible health plans with an HSA, over time, they would have the resources necessary to handle future medical emergencies. It is all about planning for the future (and getting an immediate income tax break doesn’t hurt).
I have something similar through work but opted against it since I’m young and unless something happens, tend not to need health assistance.
That’s the whole point though, something could happen. And that you’re young means you can build up the savings over more time than many.
Just a thought.
We opened an HSA tied to a high-deductible plan two years ago and it has been great. We previously had an HMO and the premiums became out of reach. Then we tried a PPO which is similar in structure to an HSA, but the deductibles were written in such a way that we really got messed over. The HSA helps me know what my maximum medical expenditures are and that is what I plan for when it comes to my contributions.