Health Savings Accounts (HSAs) are a way for consumers to pay for qualified out-of-pocket health expenses with tax-free money. As of January 1, 2004, almost anyone with a qualified high-deductible health plan can also have a Health Savings Account. HSAs can save you money on your health care now as well as provide a good way to save for future medical expenses. HSA funds can pay for expenses before you meet your deductible as well as helps pay for services not covered by your health plan, COBRA coverage during periods of unemployment, medical expenses after retirement and long-term care expenses, to name just a few.
Your high-deductible health plan can be one you get through your employer or a policy you buy on your own. Even if you get your high-deductible health plan or even your HSA account through your employer, you own your HSA account. You decide how much to contribute, how much of the account to use for health expenses, and which health expenses to pay from your account. You also choose whether to pay for health expenses from the account or save it for future use. Even if you change jobs, your Health Savings Account is still yours.
You can keep the account even if you move to another state, and you can continue to keep it as you grow older. Regardless of where you get your health insurance plan, whether on your own or through your employer, your Health Savings Account funds are yours.
Unlike some other types of accounts, you don’t lose HSA funds at the end of the year. Unspent balances remain in your account earning interest until you spend them on medical care. This will be a strong incentive for you to spend wisely on your health care, just like you do on other items you purchase. You’ll want to shop around for the best value for your health care dollars.
Health Savings Accounts (HSAs)
Health Savings Accounts are tax-advantaged personal savings accounts used in conjunction with a qualified high-deductible health plan (HDHPs) to help pay for unreimbursed medical expenses. Contributions to HSAs may be received from employers, individuals or any combination of both. Employer contributions are excludable from income and individual contributions are deductible, regardless of whether or not a taxpayer itemizes deductions. Annual contributions are limited to a statuary level and out-of-pocket maximums are limited, but individuals age 55 and over with accounts can make additional contributions. HSAs are portable and funds carry over to subsequent years.
Contributions to HSAs can be received from the following sources:
Contributions may be made by any combination of employer and individual. Employer contributions are excludable from income and individual contributions are deductible “above the line.” That is, a taxpayer does not have to itemize deductions in order to take the contribution as a deduction. Employers may offer HSAs as part of a section 125(d) cafeteria plan.
- Individual contributions are tax-deductible, even if the taxpayer does not itemize
- Employer contributions are tax-free
- Investment earnings accrue tax free
- Distributions are tax-free if used for “qualified” medical expenses (all section 213(d) expenses, except health insurance premium payments).
Qualified medical expenses include:
- Amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease
- Prescription drugs
- Qualified long-term care services and long-term care insurance
- COBRA continuation coverage required by Federal law
- Health insurance for the unemployed
- Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty may be waived in certain circumstances
- HSA funds may also be used to pay for retiree health insurance premiums other than Medigap. This includes Medicare premiums.