What are Health Savings Accounts (HSA's)? How do they work?

There are a number of health-care savings plans that provide tax advantages - some are sponsored by employers while others are open to individuals. There are Health Savings Accounts (HSAa), Health Flexible Spending Arrangements (FSAs), Medical Savings Accounts (MSAs), and Health Reimbursement Arrangements (HRAs). HSAs allow you to deposit money into a special HSA account, where it is used to pay medical bills, prescriptions, and premiums for special high-deductible health insurance policies (Medicare not eligible). The individual, his employer, or a family member can make contributions to the HSA account. If you have lots of out of pocket health expenses costs each year then getting an HSA makes financial sense. You can put almost $2750 (individual) and $5000 (Family) into one of these accounts to accrue interest tax free and pay off those health care costs each year.

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HSAs are meant to replace low-deductible, high cost health insurance, and instead require high deductible (a minimum of $1000 for single coverage and $2000 for family coverage), low monthly cost plans, and helps pay for those deductibles and co-pays out of the tax-advantaged savings from the plan. Essentially, monthly savings from the lower premiums go into the HSA and help cover actual medical expenses that arise. Contributions made my the individual are deductible on his income tax return, netting an effective tax savings of up to the individuals marginal tax rate (15%-37%). On a Health Flexible Spending Arrangements (FSAs), contributions are deducted from the individuals salary and no income tax or social security tax is withheld on that amount.

Setting up an HSA Health Savings Account

Banks, insurance companies, and IRA trustees can help you establish an HSA account - it does not have to be set up or run by your health insurance company. Fill out the required paperwork, make the required contributions, pay your premiums and out of pocket medical expenses with it, and account for it properly at tax time. Think of an HSA as a medical IRA. You can fund the HSA account each month and let your money earn interest all year or make one big deposit at the end of the tax year to get it fully funded. I usually wait until the end of the year to add up my out of pocket health care expenses and then deposit a check for the maximum amount allowed (as long as my expenses are at or beyond that level) and then ask my HSA provider to immediately send back the $$ to refund me.

Benefits of an HSA Health Savings Account

HSAs were created under the tax code in 2003. The main advantage of HSAs is the tax savings. You can deduct your contributions without having to itemize on your Federal return (use form 8889). Employer contributions do not show up in your taxable income (similar to the way normal health insurance benefits are treated). Distrbutions from the HSA for qualified medical expenses are tax-free. Any leftover money in the account at the end of the year is allowed to accumulate tax free. Spouses must have separate HSA - they are individual only accounts, not joint accounts. Also, your HSA account is not tied to a specific employer, and like a 401K account, it goes with you when you change or leave a job. It is YOUR money, not your employers. When you reach 65, the money in an HSA can be withdrawn for any reason.

Always consult with your professional tax attorney or specialist before making any financial decisions related to health care or health insurance, as tax laws and regulations change frequently.

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