Health Saving Accounts

Health Savings Accounts (HSA) were created in 2003 to be used exclusively for paying qualified health care expenses. An HSA must be used in conjunction with a High Deductible Health Plan (HDHP), which is defined as a health insurance plan with a deductible higher than $1,200 for self-only coverage or $2,400 for family coverage, as of 2012. Annual out-of-pocket expenses, including co-pays, cannot exceed $6,050 for self-only coverage or $12,100 for family coverage, as of 2012. These amounts are indexed annually for inflation. Most carriers have a wide variety of HDHPs available to purchase for both individuals and groups. Many employers, including small groups, offer HSAs as an option in their employee benefits portfolio.

How do you qualify for an HSA?

To qualify for an HSA you must first be covered under a HDHP, you must not be covered with any other health coverage, you must not be enrolled in Medicare and cannot be claimed as a dependent on someone else tax return.

How does it work?

HSAs have two elements. First, with the purchase of your HDHP, premiums for these plans are usually about 10 percent less than a traditional PPO. Premiums are reduced because the consumer takes the initial risk with a larger deductible. Remember that HDHPs generally have no copayments, so all medication, doctor office visits, MRI, surgery, etc. will be paid first by the consumer until they reach their deductible. After the deductible is met, insurance companies pay the coinsurance up to the maximum out-of-pocket limits.

The second part of an HSA is the savings account. These accounts can be opened at almost any bank, although there are several vendors out there that do almost nothing but set up and maintain HSA accounts, debit cards, check books and tax reporting. A consumer puts money into this account at their discretion throughout the year to use on their deductible and other qualified medical expenses. Remember that HSA money can be used on vision and dental as well, even if they are not covered under your normal medical plan. The beauty of the HSA is the tax advantage. Money that is put into your HSA account is an above-the-line deduction on your tax return.

An example: Sally earns $50,000 per year. She has an HDHP and opens an HSA account. She deposits $3,000 into her account. Her taxable income now becomes reduced to $47,000.

HSA money can also be rolled over year-to-year. It is not a use-it-or-lose it type account. This can develop a snowball effect because you contribute money during the good years so it's there when you need it. For most people, they have more good years than bad years so their account continues to grow, and funds in the account can earn tax-free interest and/or investment income.

When you use the money in your HSA for qualified medical expenses, it's not taxable and it's portable, meaning that if you switch your HDHP provider, you can keep the same HSA account.

Health Savings Account 2012
  Minimum Deductible Max out-of-pocket Contribution Limit
Single $1,200 $6,050 $3,100
Family $2,400 $12,100 $6,250


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