Health Savings Accounts (HSA)

Tax-Advantaged Health Insurance

Health Savings Accounts, simply called “HSAs,” are a form of health insurance that combines a health ‘savings account’ with a High Deductible Health Plan (HDHP).

Still relatively new to the market, these tax-advantaged medical savings plans are often purchased by self-employed individuals and small employers to provide tax deducted funding as well as tax free withdrawals if used towards qualified medical expenses.  HSAs, were enacted into law in January 2004 by the 108th Congress as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 under Title XII, Section 1201.

This form of medical insurance is exempt from taxation and provides for the accumulation of pre-tax dollars deposited and held in a health savings account that grows and rolls over each year to accumulate a long-term savings fund.  HSA funds are also used to pay for qualified medical expenses, such as doctors visits and prescribed medications, are not considered as gross income, and can be withdrawn from the HSA savings account tax free!  Accumulated funds can also be withdrawn without penalty or tax after the beneficiary (insured) reaches the Social Security retirement age.

The High Deductible Health Plan is defined as “a health plan which has an annual deductible which is not less than $1,000 for self-only coverage, and twice the dollar amount ($2,000) for family coverage, and the sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed $5,000 for self-only coverage, and twice the dollar amount ($10,000) for family coverage.”

The Health Saving Account is defined as “a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary,” i.e, the insured.  The current 2011 contribution limit on an HSA is $3,050 for an individual and $6,150 for a family.

Withdrawing funds from an HSA is usually done with the use of a debit card or check.  In addition to doctors visits and prescription medications, HSA funds can be withdrawn tax-free for any benefits that the plan requires deductible payment, coinsurance, or other covered plan costs.  As of January 2011, non-prescribed over-the-counter medications can no longer be purchased using tax-free funds.

Since its inception, HSA plans have become more popular and are often used by younger, healthier individuals due to lower premium costs, high deductible options, and the ability to accumulate tax-free dollars for retirement.