What is a
Health Savings Account...
and Is It Right For Me?
Health Savings Accounts (HSAs) were started in 2003 as a result of a bill signed by President Bush.
An HSA is basically a tax sheltered savings account individuals and families can set up and use to pay for qualified, out of pocket medical expenses. In order to be eligible for an HSA, you must have a qualified High Deductible Health Plan (HDHP), which is usually much less expensive than typical health insurance, but has a much higher out of pocket cost.
Although an individual or family must pay higher out of pocket costs until they reach their annual deductible, many qualified HDHPs will still cover preventative care, such as routine exams, a woman’s annual gynecological visit, immunizations, prenatal care, and physicals. All other qualified medical expenses, including prescriptions, are paid using the funds in your Health Savings Account. Usually, you can also get a debit card and/or check writing ability with an HSA.
HSAs can provide tax relief as well as save the average person a significant amount of money on a monthly basis. Contributions (For 2009, up to $3,000 for an individual and $5,950 for a family) to your HSA are tax deductible “above the line”. This means that you receive a tax deduction on your tax return for the amount of money you contribute to your HSA, regardless of whether or not you itemize your deductions, up to the limits outlined above.
In addition, your health savings account can also grow tax free…meaning you don’t have to pay income taxes on the interest, dividends, or other growth of your HSA.
Furthermore, most qualified High Deductible Health Savings Plans are much less expensive than typical health insurance plans.
The theory behind all of this, is that you can use the extra money saved by purchasing an HDHP instead of typical insurance, to contribute to your HSA. Then, when you need to pay for your out of pocket medical expenses, you should pay for them using the money in your HSA.
Kind of like your very own flexible spending account…with one major benefit…whatever money you have left in your HSA at the end of the year simply rolls over to the next year, continuing to grow tax free. It’s NOT a “use it or lose it” situation.
It should be noted, however, that you can add money incrementally to your HSA as you see fit, but if you withdraw money from your HSA or use it to pay for non-qualified medical expenses, you will be subjected to income taxes on this amount plus a 10% penalty.
But still, you are in control of it!! And once you reach the age of 65, you can withdraw the money to pay for non-qualified medical expenses, subject to income tax, but not subject to the 10% penalty.
So, Who Should Use a Health Savings Account?
General consensus is that individuals with few health problems benefit the most from a Health Savings Account. Due to its portability, flexibility, affordability, and the fact that you rarely seek medical care, makes an HSA an excellent choice for some.
An HSA, similar to an IRA, provides you a place to deposit money, receive a tax deduction, allow the money to grow tax free, withdraw it tax free for qualified medical expenses, and then, once you reach the age of 65, withdraw it for any reason (subject to income taxes), without incurring the 10% early withdrawal penalty.
So, When Is A Traditional Insurance Plan Better?
If you have chronic ailments that require frequent doctor visits, medical care or numerous prescriptions, using an HSA could get very costly. In this case, picking a traditional, health insurance plan may make more sense. Since with an HDHP you are required to pay for these costs until you reach your deductible (The minimum deductible amounts for 2009 are $1,150 for an individual and $2,300 for a family), these costs can be very high.
On top of all this, you are allowed to use the money in your HSA for a much broader range of medical expenses, many of which are not covered by traditional health insurance. Expenses such as dental checkups, prescriptions, contact lenses, orthodontics, and others can be paid with your HSA funds, even though they are oftentimes not covered by traditional health insurance plans. Please visit the Internal Revenue Service website for a list of HSA qualified expenses.
In conclusion, whether or not to use a Health Savings Account is a personal choice that may affect many areas of your life. Therefore, be sure to carefully assess your personal circumstances, especially your physical and financial health, and do your proper research before making the switch from traditional health insurance to a Health Savings Account.
To Your Success...
David Jesse, Your Fellow Average Joe