How Health Savings Accounts Work

Health Savings Accounts are a relatively new type of medical savings account that allows for both tax-deductible contributions and tax-free distributions as long as the money is used to pay for qualified medical expenses. Perhaps best of all, any unused funds in these accounts can eventually be withdrawn as retirement income. HSAs can therefore provide not only a means to pay for medical insurance and expenses, but can also function as an additional avenue for retirement savings.

The basic requirements that must be met to open one of these accounts are as follows:

1. Neither the accountholder nor his or her spouse can be eligible for any other type of standard group health insurance coverage, including Medicare (although coverage for dependents is allowed.) However, some programs such as prescription discount cards are permitted.
2. HSAs also require the purchase of a qualifying high-deductible health insurance policy (HDHP) with a minimum deductible of $1,100 for singles or $2,200 for families. These policies are specifically structured to pay for only major or catastrophic medical expenses. For 2008, the annual out-of-pocket copays cannot exceed $5,600 for singles or $11,200 for families. These policies are allowed to have first-dollar coverage for preventive care and higher limits for non-networked expenses. Additional catch-up contributions ($900 in 2008) are also available for those aged 55 and up.
3. For 2008, the contribution limits for Health Savings Accounts are $2,900 for singles and $5,800 for families. The contribution amount into the H S A is allowed to exceed the deductible from the policy.
4. Many different financial institutions, such as banks, credit unions, brokerage firms and insurance companies offer these plans, and the number is rapidly growing.

Tax benefits of H S AsOnce the requirements have been met, however, Health Savings Accounts will provide the following tax advantages:

1. All contributions made to these accounts are deductible just like Traditional IRA or other retirement plan contributions. You do not have to itemize deductions in order to qualify.
2. All premiums paid for tax-qualified long-term care insurance policies are deductible within certain limits, as long as the accountholder is age 65 or above. Regular health and medical insurance premiums can also be deductible for those under 65 that are unemployed.
3. All distributions from Health Savings Accounts that are used to pay for qualified medical expenses are tax-free. For the purpose of Health Savings Accounts, “qualified medical expenses” has an extremely broad definition, encompassing everything from over-the-counter drugs to acupuncture and other esoteric remedies, as long as it is not for cosmetic treatment. Furthermore the money contributed to the accounts can be invested (the types of investments permitted are the same as for IRAs), which means that over time it is possible to achieve tax-free income generated solely by the investment portfolio within the account.
4. A one-time transfer of an IRA or Archer MSA balance to a Health Savings Account is also permitted, up to the contribution limits. This is obviously an advantage for those who have medical bills that an IRA distribution must be taken to pay for.
5. Perhaps best of all, any unused money that is not paid out for medical expenses can eventually be used as retirement income, just like an IRA. This substantially reduces much of the risk inherent in paying for traditional health insurance, where the premiums paid are obviously lost if no claim is made.

Further benefits of H S As
For those that qualify, Health Savings Accounts can resolve a huge dilemma between saving for retirement and paying current or possible future medical bills. This is particularly true when long-term-care may be needed. While the cost of a nursing home or other skilled care can be staggering for many, the opportunity cost of paying for long-term-care insurance is also very high. Health Savings Accounts ultimately represent the next major step forward in tax relief for those without access to group health coverage. Those who qualify have absolutely nothing to lose by opening one, as all contributions are guaranteed to be used one way or another. If you qualify for this account, you are well-advised to contact a local H S A provider immediately.