Health Savings Accounts (HSA's)

Opening Your Health Savings Account
High Deductible Health Plans (HDHP's)
Advantages of HSA's
Tax Savings
Making Contributions
HSA Contributions
Determining Your Contribution

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 pulling money into these accounts, including favorable tax treatment. HSA’s were signed into law by President Bush on December 8, 2003.

Opening Your Health Savings Account - Banks, credit unions, insurance companies and other financial institutions are permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSA’s are also automatically qualified to establish HSA’s.

High Deductible Health Plans (HDHP's) - You must have coverage under an HSA-qualified “high deductible health plan” (HDHP) to open and contribute to an HSA. Generally, this is health insurance that does not cover first dollar medical expenses. Federal law requires that the health insurance deductible be at least:

$1,100* -- Self-only coverage
$2,200* -- Family coverage

In addition, annual out-of-pocket expenses under the plan (including deductibles, co-pays, and co-insurance) cannot exceed:

$5,500* -- Self-only coverage
$11,000* -- Family coverage

In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for ‘preventive care’ services on a first-dollar basis (with or without a co-pay). “Preventive care” can include routine pre-natal and well-child care, child and adult immunizations, annual physicals, mammogram's, pap smears, etc.

Advantages of HSA's

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 higher 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 expenses 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 money 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 company 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 marital 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 HSA’s.

Tax Savings — An HSA provides you triple tax savings:
  1. tax deductions when you contribute to your account;
  2. tax-free earnings through investment; and,
  3. tax-free withdrawals for qualified medical expenses.

Making Contributions

HSA Contributions
You can make a contribution to your HSA each year that you are eligible. You can contribute up to the amount of your HDHP deductible but no more than:

$2,850* -- Self-only coverage
$5,650* -- Family coverage

Individuals age 55 and older can also make additional “catch-up’ contributions. The maximum annual catch-up contribution is as follows:
      2007 - $800
      2008 - $900
      2009 and after - $1,000

Determining Your Contribution

Your eligibility to contribute to an HSA is determined by the effective date of your HDHP coverage. If you do not have HDHP coverage for the entire year, you will not be able to make the maximum contribution. All contributions (including catch-up contributions) must be pro-rated. Your annual contribution depends on the number of months of HDHP coverage you have during the year (count only the months where you have HDHP coverage on the first day of the month).

Contributions can be made as late as April 15 of the following year. You can use the money in the account to pay for any “qualified medical expense’ permitted under federal tax law. This includes most medical care and services, and dental and vision care, and also includes over-the-counter drugs such as aspirin.

You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:
  • Any health plan coverage while receiving federal or state unemployment benefits.
  • COBRA continuation coverage after leaving employment with a company that offers health insurance coverage.
  • Qualified long-term care insurance.
  • Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for:
    1. Part A (hospital and inpatient services)
    2. Part B (physician and outpatient services)
    3. Part C (Medicare HMO and PPO plans)
    4. Part D (prescription drugs)

You can use the money in the account to pay for medical expenses of yourself, your spouse, or your dependent children. You can pay for expenses of 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. Examples include:
  • Medical expenses that are not considered “qualified medical expenses’ under federal tax law (e.g., cosmetic surgery).
  • Other types of health insurance unless specifically described above.
  • Medicare supplement insurance premiums.
  • Expenses that are not medical or health-related.

After you turn age 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional 10% penalty.
*2007 amounts; adjusted annually for inflation.