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The U.S. Congress recently passed legislation which
makes paying for medical expenses much more affordable
for consumers. As of January 1, 2004, the new law provides
broad access to Health Savings Accounts, which allow
consumers to pay for qualified medical expenses with
pre-tax dollars (income-tax free!) and save for retirement
on a tax-deferred basis.
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A Health Savings Account (HSA) is a tax-favored saving
account that is used in conjunction with a high-deductible
HSA-eligible health insurance plan to make healthcare
more affordable and to save for retirement. |
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HSAs are similar to IRAs, but
even better:
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Pre-tax money is deposited each year into an
HSA and can be easily withdrawn at any time with
no penalty or taxes to pay for qualified medical
expenses. Withdrawals can also be made for non-medical
purposes, but will be taxed as normal income and
are subject to a 10 percent penalty if done prior
to age 65. |
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Any HSA funds not used each year remain in the
account, and earn interest tax-free to supplement
medical expenses at any time in the future. |
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Like an IRA, the account belongs to you, not
your employer. But unlike an IRA, your employer
CAN contribute to your HSA. |
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Why should I get an HSA?
You can save money in the short and long term by:
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Deducting 100% of your HSA contributions from
your taxable income |
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Having the money in your HSA accrue interest
and/or gains on a tax-free basis |
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Paying no penalties or taxes when you use your
HSA to pay for qualified medical expenses |
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Having a high-deductible HSA-eligible health
insurance plan, which typically has a lower premium
than a plan with a lower deductible |
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What are qualified medical expenses?
HSAs can be used to pay for many types of medical expenses,
even some that are often excluded on health insurance
plans.
- These include:
- Contact Lenses
- Chiropractic Procedures
- Acupuncture
- Wellness Visits
- Birth Control Pills
- Dental Care
Typically HSAs cannot be used to pay health insurance
premiums, although there are exceptions for:
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Health insurance premiums if you are receiving
federal or state unemployment benefits |
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Premiums for COBRA qualified health insurance
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Long-term care insurance premiums |
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Premiums for a health plan (other than a Medicare
supplemental policy) for an individual age 65
or older
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What insurance plans are HSA-eligible?
In order to have a Health Savings Account, you must
get an HSA-eligible health insurance plan. This type
of insurance plan is often referred to as a High Deductible
Health Plan (HDHP), and is typically less expensive
than plans with lower deductibles.
A health insurance plan must meet the following criteria
to be considered HSA-eligible: The health insurance
plan must have an annual deductible of at least $1,000
for individuals and at least $2,000 for families.
The sum of the annual deductible and the other annual
out-of-pocket expenses required to be paid under the
plan (other than premiums) does not exceed $5,000
for individuals and $10,000 for families.
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How much can I contribute to my HSA?
Maximum yearly contributions (and associated tax deduction)
are determined as follows: For individuals, it is the
lesser of:
a) $2,600
b) Your health plan's annual deductible*
For families, it is the lesser of:
a) $5,150
b) Your health plan's annual deductible*
You do not have to contribute the maximum each year,
although some HSAs require a small minimum monthly deposit.
Note: If you are between the ages of 55 and 65, you
can make an additional annual "catch up"
contribution (of up to $500 in 2004.)
*If you enroll in an HSA-eligible health plan in
the middle of the calendar year, your maximum contribution
for the first year will be prorated based on the number
of months you have the HSA-eligible health plan. For
example, if your individual health plan's annual deductible
is $3600, and you enroll in the HSA-eligible plan
on June 1st, then your maximum contribution for the
first year can be up to $2100 (i.e. 7/12 of $3600).
If you are enrolled for all twelve calendar months,
then you can contribute the amount of the deductible
up to the annual maximum allowed ($2600 in Year 2004).
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Is my money safe?
Funds in an HSA are held in a trust and are administered
by a bank, insurance company, or other approved Trustee.
Funds in your HSA are invested at your discretion.
Typically an HSA will allow you to choose from the
following options:
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Interest-bearing account |
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CDs |
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Money market funds |
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Mutual funds |
If you are looking to minimize your investment risk,
you may want to consider an interest-bearing account;
these accounts are FDIC insured. On the other end of
the spectrum, mutual funds may provide a greater return,
but are more risky, and are not FDIC insured.
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How do I use the funds in my HSA?
Using funds in your Health Savings Account is easy:
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Typically an HSA will provide you with a checkbook
or debit card. When you pay for a qualified medical
expense, use the debit card or check to make the
payment. |
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You do not need to get approval from the HSA
administrator when you use funds in your account. |
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You do not need to submit receipts to the HSA
administrator, although you should save them just
as you keep receipts for other items that are
deducted from your taxes. |
NOTE: You must establish the HSA before you incur medical
expenses otherwise the expenses will not qualify.
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How do the tax savings work?
HSAs make it easy to save on your taxes:
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At the end of each year, you will be sent a
statement showing the amount you contributed to
your HSA that year. You can deduct this amount
provided it is less than or equal to the maximum
allowable contribution. |
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Much like an IRA, HSA deductions are "above-the-line"
and thus can be taken even if you do not itemize. |
If you are self-employed, in addition to deducting your
HSA contributions, you may be able to deduct 100% of
your health insurance premiums, provided that:
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You are not eligible to participate in a subsidized
health plan offered by an employer or your spouse's
employer. |
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The deduction does exceed the amount of net
income from your business. |
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