Health Savings Account (HSA)

Health Savings Accounts (HSAs) were created by the Medicare bill enacted on December 8, 2003. Employers are beginning to offer HSAs to their employees as a health insurance option to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.

An HSA is similar to an IRA or a 401(k) retirement plan, except that money in an HSA is used to fund a high-deductible premium for health care costs. Used in conjunction with a compatible high-deductible plan, an HSA can be a smart alternative to traditional premium-based co-pay plans.

Deposits to an HSA are 100% tax-deductible for the self-employed and can be easily withdrawn by check or debit card to pay routine medical bills with tax-free dollars. Larger medical expenses are covered by a low-cost, high deductible health insurance policy. Money not used in the account rolls over each year and continues to grow interest on a tax-favored basis to supplement retirement, just like an IRA.

A high-deductible health plan establishes a deductible amount the member must pay before a traditional co-pay or no-pay insurance plan takes effect. This reduces overall premium costs substantially and insures members only pay for medical care they actually receive.

Health Savings Account (HSA) holders can choose to save up to a certain amount, depending on whether they are an individual or family, and these contributions are 100% tax deductible from gross income. These amounts can change yearly, so for updated numbers, visit IRS.gov.

The Affordable Care Act has placed new restrictions on HSAs. HSA funds can no longer be used to buy over-the-counter drugs without a prescription.  Additionally, utilizing HSA funds for nonmedical withdrawals face an increased tax penalty.

HSA Advantages

• You spend your HSA contribution when you need medical care, not on premiums for health services you may never use.
• You receive 100% coverage with no deductible for preventive care services like routine check-ups, immunizations and screenings.
• Your HSA contributions, investment interest and earnings, and medical expense withdrawals are tax-free.
• The funds are yours. They remain in your account until you use them, continuing to earn interest, regardless of how long they remain in the account or whether you change employers.

HSA medical care expenses coverage

HSA funds can be withdrawn for any reason. However, amounts withdrawn to pay for qualified medical expenses are not taxable (preventive care has 100% coverage with no deductible).

Qualified medical expenses generally include services covered under a medical plan, along with other health-related services and therapies.

Examples include:

• Medical and dental deductibles and co-payments
• Eye exams, eyeglasses, contact lenses, corrective LASIK surgery
• Hearing aids
• Orthodontia
• Expenses in excess of medical, dental and vision plan limits
• Prescription drugs, including insulin
• Over-the-counter medications, with certain restrictions

HSA Disadvantages

Because HSAs are relatively new to health care management, some physicians and service providers may not know all the rules and guidelines of the plan.

You may only participate if you are enrolled in an HSA-compatible, high-deductible health plan. You may not be enrolled in Medicare, claimed as a dependent on another’s tax return or be enrolled in another health plan that is not a high-deductible health plan.

HSA contributions

Minimum contributions can change yearly, and range depending on whether you are in individual or family. For the most up-to-date information, visit IRS.gov.