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Health Savings Accounts

Find out about health savings accounts.

A health savings account can provide much needed emergency funds. [©Jupiter Images, 2010]
©Jupiter Images, 2010
A health savings account can provide much needed emergency funds.

Health Savings Accounts

Health savings accounts (HSAs) are a valuable tool that can be used to combat the ever-increasing cost of health care coverage in the United States. Although there are strict rules regarding eligibility and the maximum amounts that can be saved each year, HSAs can help customers defray the cost of medical coverage by allowing users to save money on a pre-tax basis to cover medical bills.

Characteristics of Health Savings Accounts

HSAs are savings accounts set up to help defray the cost of medical care. According to the United States Treasury, these accounts are designed for those individuals and families who have health plans with high deductibles. HSAs are different from health insurance, flexible spending accounts and medical spending accounts in that they can be considered an alternative to traditional health insurance because they allow the account holder to save for both current and future health care needs with pre-tax dollars.

Health insurance, on the other hand, is coverage typically provided as a benefit by an employer. The employee may pay a portion of the charges with pre-tax dollars, but the insurance benefits and bills are paid by the insurance companies (minus the employees deductible). This is different from an HSA in two main ways: contributions to the account are made solely by its owner; and there is a maximum amount allowed in contribution.

HSAs also differ from employee sponsored flexible spending accounts (FSA) because the money in them can roll over and continue to grow from year to year, whereas the FSA dollars are lost if not used in the current year.

Eligibility for Health Savings Accounts

To qualify for participation in an HSA, the investor (which can be an individual or family) must have a high-deductible health plan (HDHP). These plans are typically less expensive than traditional coverage but, as the name indicates, they carry a high deductible. HSAs are not allowed for those who have no insurance, are participating in Medicare or have received Veterans Administration benefits within the last 3 months. It is important to note, however, the individuals do not need to be employed to qualify they simply need to be enrolled in an HDHP.

Benefits of Health Savings Accounts

HSAs have several benefits. First, they carry a range of excellent tax benefits. For instance, money invested in HSAs is tax deductible and can grow free from federal taxes (similar to individual retirement accounts, or IRAs). This promotes growth for a long term basis, especially if not all the dollars were used in the year contributed. Another tax advantage is that the money can be withdrawn from the HSA for qualified medical expenses.

Another benefit is that the account owner controls how its money is invested and how it is spent, without input from an insurance company. This could encourage plan members to exercise caution in selecting health care since it is their money being spent, rather than having the cost be covered by a large insurance company.

Finally, because customers are likely to be more frugal with their health care dollars, it may drive positive reform in the health care industry by encouraging healthcare providers to evaluate fair market value for their services. There are also no income limits for participation in an HSA, though there are contribution limits that vary from year to year.

Opening a Health Savings Account

HSAs can be opened through an insurance company, credit union, bank or employer. If offered through the employer, participants can generally fund the account with pre-tax dollars; if not, the tax benefit may not be recognized until the following year, after tax returns are filed.

HSA Insider offers some useful tips on opening and managing a health savings account. For example, couples can open separate accounts, and all accounts must be opened at institutions that meet the IRS standards for being a custodian or trustee for IRAs (insured banks or credit unions automatically qualify for this status.) Accounts can also be opened before coverage begins in a high deductible health plan, but they will not become established or active until the day coverage begins in the HDHP.

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