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Banking & Finance

2011-03-01 11:31:00

Health savings accounts

Question: What is a Health Savings Account?

Answer: On December 8th, 2003, President Bush signed a law authorizing financial institutions to make available Health Savings Accounts. A Health Savings Account (HSA) is an account that you can put money into to save for future medical expenses. There are certain advantages to putting money into these accounts, including favorable tax treatment. Any adult can contribute to an HSA if they: •Have coverage under an HSA qualified “high deductible health plan” (HDHP). •Have no other first dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long-term care insurance are permitted). •Are not enrolled in Medicare. •Cannot be claimed as a dependent on someone else’s tax return. Contributions to your HSA can be made by you, your employer, or both, however, the total contributions are limited annually. If you make a contribution, you can deduct the contributions (even if you do not itemize deductions) when completing your federal tax return. Contributions to the account must stop once you are enrolled in Medicare. However, you can keep the money in your account and use it to pay for medical expenses tax-free. You can use the money in the account to pay for any “qualified medical expense” permitted under federal law. This includes most medical care and services, and dental and vision care and also includes over-the-counter drugs such as aspirin. The account can be used for medical expenses of yourself, your spouse, or your spouse and dependent children even if they are not covered by your HDHP. Any amounts used for purposes other than to pay for “qualified medical expenses” are taxable as income and subject to an additional 10% tax penalty. After you turn 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enrolled in Medicare, the account can be used for other purposes without paying the additional 10% penalty. Advantages of HSAs Security – Your high deductible insurance and HSA protect you against high or unexpected medical bills. Affordability – You should be able to lower your health insurance premiums by switching to health insurance coverage with a high deductible. Flexibility – You can use the funds in your account to pay for current medical expenses, including expenses that your insurance may not cover, or save the money in your account for future needs, such as: •Health insurance or medical expenses if unemployed •Medical expenses after retirement (before Medicare) •Out-of-pocket expenses when covered by Medicare •Long-term care expense and insurance Savings – You can save the money in your account for future medical expenses and grow your account through investment earnings. Control – You make all the decisions about: •How much to put into the account •Whether to save the account for future expenses or pay current medical expenses •Which medical expenses to pay from the account •Which financial institution will hold the account •Whether to invest any of the money in the account •Which investments to make Portability – Accounts are completely portable, meaning you can keep your HSA even if you: •Change jobs •Change your medical coverage •Become unemployed •Move to another state •Change your martial status Ownership – Funds remain in the account from year to year, just like an IRA. There are no “use it or lose it” rules for HSAs. To open a HSA, check with your local credit union or bank to see if they offer HSA accounts.