Overview of Health Savings Accounts

HR Resource
September 25, 2012 — 2,226 views  
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A Health Savings Account (HSA) is actually a health insurance policy as well as a financial account. To establish an HSA, you must have a High Deductible Health Plan (HDHP). The HDHP is a low-cost insurance policy that has preventive care benefits and a high annual deductible. The HSA works like a checking account with a financial institution. You can write checks or use a debit card to withdraw funds from the account for paying any medical expenses not paid by the HDHP.

You can set up your HSA account at any financial institution that offers the service. Most custodians allow you to determine the type of account you want to use for your HSA deposits. You may want to keep some of the money in a savings account from which you can easily withdraw funds to pay medical bills when necessary. Placing the remainder of your HSA funds in a certificate of deposit or other investment account will allow you to earn a higher interest rate on them. You can also purchase your HDHP from the insurance company of your choice and switch companies any time you find a better plan. 

Tax Benefits

Deposits to an HSA lower your taxable income. In addition, you do not have to pay tax on the amount you withdraw from the account when you use the money to pay for qualified, IRS-defined health care expenses. After age 65, you may withdraw funds for any reason without paying tax on them. You can deposit to the HSA until you are 65 years old and keep the money in the account as long as you like without tax consequences. You may contribute any amount to your HSA account up to the IRS limit for each tax year. Any funds not used during the year can remain in the account. 

HSA Advantages

· Lower premium for health insurance
· Lower health insurance premium rate of increase
· Lower taxable income
· Pay for health care expenses with pre-tax funds
· Better benefits for preventive care
· Good long-term savings source

HSA Tradeoffs

· Health insurance plan possibly less generous
· Major medical deductible potentially higher
· Prescription co-pay and office visit benefits probably not as good as those of HMO and PPO plans
· Possible increase in out-of-pocket expenses for health care

HDHP insurance premiums are lower for people who have HSAs, and those who have minimal health-care needs gain the most from the accounts. People who frequently need medical care and use many prescriptions may benefit more from standard insurance plans because of the high deductibles they have to pay with HSAs.

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