HEALTH SAVINGS ACCOUNTS: A TAX-FREE PAYMENT OPTION
What is a Health Savings Account (HSA)?
A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.
You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can be put into the Health Savings Account.
You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.
How can I get a Health Savings Account?
Consumers can sign up for HSAs with banks, credit unions, insurance companies and other approved companies. Your employer may also set up a plan for employees as well.
How much does an HSA cost?
An HSA is not something you purchase; it’s a savings account into which you can deposit money on a tax-preferred basis. The only product you purchase with an HSA is a High Deductible Health Plan, an inexpensive plan that will cover most of your medical expenses should your expenses exceed the funds you have in your HSA.
How much can I contribute to my HSA each year?
Your annual HSA contribution cannot exceed the deductible of your HDHP. For example, if you choose a plan with a deductible of $1,000, you may not deposit more than $1,000 in your HSA for that year. If you want to save more, you must choose an HDHP with a higher deductible. If you are age 55 or older, you can also make additional “catch-up” contributions (see below).
I have a very high deductible, is there a limit on how much I can contribute?
The most you can put into your account for 2005 is $2,650 if you have single coverage and $5,250 for a family. These amounts will be increased for inflation in future years.
Do my contributions provide any tax benefits?
Your personal contributions offer you an “above-the-line” deduction. An "above-the-line" deduction allows you to reduce your taxable income by the amount you contribute to your HSA. You do not have to itemize your deductions to benefit. Contributions can also be made to your HSA by others (e.g., relatives). However, you receive the benefit of the tax deduction.
May a self-employed person contribute to an HSA on a pre-tax basis?
No. Self-employed persons may not contribute to an HSA on a pre-tax basis and may not take the amount of their HSA contribution as a deduction for SECA purposes. However, they may contribute to an HSA with after-tax dollars and take the above-the-line deduction.
Example for a patient in a 28% tax bracket:
If an out-of-pocket visit to an ND costs $200, using tax-free money from an HSA would decrease the expense by an estimated 28% or $56. So the actual cost at the end of the tax year is $144.
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