According to Wikipedia, a health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). A high deductible health plan (HDHP) is a plan that features higher deductibles than traditional insurance plans. High deductible health plans (HDHPs) can be combined with a health savings account or a health reimbursement arrangement to allow you to pay for qualified out-of-pocket medical expenses on a pre-tax basis. The Affordable Care Act (ACA) indicates which health plans available through the marketplace are required to carry an HSA account to be an alternate program. The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty. Withdrawals for non-medical expenses are treated very similarly to those in an individual retirement account (IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.
In order to qualify as a high deductible health plan, your health plan must have a minimum and maximum out-of-pocket expense of no less than:
|Year||Minimum deductible (single)||Minimum deductible (family)||Maximum out-of-pocket (single)||Maximum out-of-pocket (family)|
These figures are modified annually to keep up with the change in the cost of living.
Where can I get an HSA savings account?
Most local banks in your area can help you open an HSA savings account. To qualify, you must carry a high deductible health plan, also known as catastrophic health insurance.
When can I use my HSA funds?
You can use the funds in your HSA to cover deductibles, co-pays, medical supplies, and expenses not covered by insurance, such as over-the-counter drugs (with a prescription).
You can also pay for qualified medical expenses for your spouse or dependents. However, any funds withdrawn for nonqualified medical expenses or other purposes will be subject to a 20% penalty and income taxes. You can see the complete list of qualified medical, dental, vision and pharmacy expenses in IRS Publication 502—Medical and Dental Expenses. If you have dependents, you can also check the complete list of qualified dependent care expenses for a dependent care FSA in IRS Publication 503—Child and Dependent Care Expenses.
Please remember that you are solely responsible for documenting all of your medical expenses. Fines and penalties from the IRS could exist if you do not have documentation of your medical expenses declared.
Once you become eligible for Medicare your contributions must cease, but you can continue to use your health savings for health expenses, or use them for any other purpose (subject to normal income taxes) until the account is exhausted of funds.
What are the federal tax advantages of a HSA?
- Individual contributions to your HSA are tax-deductible up to the allowable limit.
- Interest earned is tax-deferred until withdrawn.
- Distributions (funds withdrawn from your HSA) are tax-free if used to pay for qualified medical expenses, including some expenses not covered by insurance
- Distributions to pay for qualified medical expenses for your spouse and dependents are tax-free as well, even if they are not covered by your health insurance
What other benefits do HSAs offer?
- There is no “use to or lose it” clause – your account funds carry over from year-to-year.
- HSAs are completely portable, regardless of your employer, which state you live in, or future changes in your marital status or medical coverage. HSAs encourage you to manage and spend your healthcare funds wisely.
- Since your funds carry over, HSAs reward you for managing and spending your healthcare funds wisely.HealthEquity and the US government.
Information for this blog has come from the websites of Wikipedia.com, TD Banknorth, HealthEquity and the US government.