You'll need Adobe Acrobat Reader to
view documents indicated
by this symbol
Click below for the latest free
version of Adobe Acrobat Reader
|
Health Savings Accounts (HSAs) were created by the "Medicare
Prescription Drug, Improvement and Modernization Act of 2003,"
signed into law on December 8, 2003. They are designed to help
individuals save for current and future qualified medical and
retiree health expenses on a tax-free basis.
An HSA is an account you open at a bank or other institution,
similar to opening any other type of savings account or IRA.
Some people have called HSAs a "medical IRA."
Together with the HSA, you need to buy a "qualified"
high-deductible health plan (HDHP). All the HDHPs shown on
this site are "qualified." The idea is to buy a HDHP that has
a lower premium than a low-deductible plan with a higher
premium, and deposit the difference to an
HSA. The money in the HSA then pays for qualified medical
expenses up to the deductible of the HDHP. After reaching the
deductible, the insurance carrier begins paying benefits.
So...expenses up to the deductible are "self-insured" by you
from money in your HSA. In other words, you pay for expenses
lower than the deductible from your HSA, and the insurance
carrier takes over when expenses exceed the deductible. Banks
that offers HSAs usually include a debit card and/or supply of
checks so you can pay for your qualified medical expenses
directly from your HSA.
Shown below is an illustrated example for a single
person
of how a traditional $500 low-deductible plan could compare
to a $1,500 HDHP with an HSA. |
|
|
Instead
of buying a $500 deductible plan for the monthly premium shown
below |
|
You buy a
$1,500 HDHP and deposit the difference in an HSA |
|
|
|
|
$250
monthly premium |
|
$125
monthly premium |
| |
$125
monthly deposit to HSA |
|
|
|
|
In the above
example, you'd save $125 premium per month ($1,500 annually).
The annual savings could be deposited to an HSA and be used to
pay for qualified expenses under the $1,500 deductible. You
still pay the same total amount ($250) each month, but the
money is divided between a less expensive high-deductible plan
and your deposits to an HSA. |
|
|
How do
you save money? First, you spend less on the insurance
premium. Second, the money deposited to the HSA is tax
deductible (even if you don't itemize), so you save money by
not paying as much in taxes. Last, if you don't have annual
expenses that exceed the amount deposited to your HSA, the
unused money stays in the HSA account and rolls over to future
years. You own the HSA account; the money stays with you, not
the insurance company. The money in the account earns interest
tax-free, and is used tax-free to pay for
qualified expenses. |
|
|
Here are some
additional facts and benefits about HSAs: |
-
Persons not covered by Medicare are eligible to have an HSA only if they
are covered by a "qualified" high-deductible health plan (HDHP).
-
Contributions are tax deductible
(even if the account beneficiary does not itemize) and may be made by
individuals, family members or an employer.
-
Interest earnings grow tax-free.
-
Withdrawals are tax-free
if they are used to pay for "qualified medical expenses."
Qualified expenses include prescription drugs, dental and vision care, qualified long-term care
services and
long-term care insurance, COBRA coverage, Medicare Part B or D premiums
(but not Medicare Supplement or "Medigap" policies), retiree health
expenses for individuals
age 65 and older, and any other expenses listed in IRS Publication 502
(Medical and Dental Expenses) under "What
Medical Expenses Are Includible?"
-
By
law, all covered services (except for "Preventive Care") must be paid by
the carrier after the deductible is satisfied.
-
For "self-only"
policies in 2008, a qualified HDHP must have a minimum deductible of $1,100 with
a $5,600 maximum on out-of-pocket expenses (including the deductible), indexed annually.
The maximum you may contribute is $2,900 (indexed annually), even if
that exceeds your deductible, and even if not enrolled for an entire
calendar year (a special rule applies).
-
For "family"
policies (2 or more individuals enrolled) in 2008, a qualified HDHP must have a
minimum deductible of $2,200 with an $11,200 maximum on out-of-pocket
expenses (including the deductible), indexed annually. The maximum you
may contribute is $5,800 (indexed annually), even if that exceeds your
deductible, and even if not enrolled for an entire calendar year (a
special rule applies).
-
Individuals age 55 to 65 may make additional "catch-up" contributions of
up to $900 in 2008, increasing to $1,000 annually in 2009 and
thereafter.
-
Withdrawals made from an HSA for any purpose other than "qualified
medical expenses" shown above are subject to income tax and a 10%
penalty. The 10% penalty is waived in the case of death or disability.
The 10% penalty is also waived for withdrawals made by individuals age
65 and older; only income tax applies.
-
Upon
death, HSA ownership may transfer to the spouse on a tax-free basis.
|
|
|
The idea of
an HSA
combined with a HDHP may not
suit everyone, but it could
potentially save you thousands of dollars in future years
between the tax deduction savings, tax-free interest earnings
and tax-free withdrawal for qualified medical expenses...in
addition to the fact that you are paying a lower monthly
premium for your health insurance plan in the first place! Most individual HDHPs do not cover prescription drugs
or maternity (many
group "employer-sponsored" HDHPs do cover prescriptions, and
maternity), so you need to evaluate how many prescriptions you
take and the cost of each annually, along with considering if
maternity is a needed coverage. |
|
|
To begin
with, we suggest you may want to consider a deductible no
higher than $2,000 for a single person or $4,000 for a family. In a future year, once the accumulated
money in your HSA "nest egg" has grown, you could change to a higher
deductible to save even more money on your insurance premium
and contribute more to your HSA. |
 |
