Health Savings Accounts were signed into law by President Bush on December 8, 2003, as an effort to put consumers back in charge of their health care, and to make health coverage more affordable for the uninsured.  The HSA provides a way to save for future medical expenses, or can be used to pay for current health care needs.  Contributions to an HSA are tax-deductible, and so HSAs are commonly thought of as a health IRA. 

An HSA is used in conjunction with a high-deductible health plan (HDHP).  The minimum deductible for an HSA-qualified HDHP is currently $1100 for an individual or $2200 for family coverage.  The maximum allowable annual out-of-pocket expenses, including deductibles, co-pays, and co-insurance, cannot exceed $5600 for individuals or $11,600 for family coverage.  When the deductible has been met for the year, traditional coverage will begin with your HDHP.

Some HSA-qualified health plans provide first-dollar coverage, meaning no deductible, for preventative care.  Preventative care can include, but is not limited to, routine annual physical exams, well-visits, immunizations, and other routine exams that are nationally recommended for your well-being.  With these types of plans, the standard deductible will apply to diagnosis-type expenses, which can include things like doctor visits for the common cold, x-rays, lab work, emergency room visits, and hospitalization.

You should be able to lower your health plan premiums when you have a higher deductible, so the premium savings can be put into an HSA.  If you don't use your HSA funds, your account will continue to grow year after year, until you decide when you want to use the money.

Funds from an HSA may be used for many types of medical expenses, even if those types of expenses are not covered by your health plan.  Some examples of qualified medical expenses include pre-natal care, dental care, many types of over the counter medications, smoking cessation programs, and vision care, including lasik vision correction.  Funds from your HSA may also be used to meet your deductible for your health plan.  It's your money and your choice.

Generally, you can not use HSA funds to pay for your health insurance premiums, except under a few special circumstances.  Medicare recipients may use HSA funds for their Medicare premiums and out-of-pocket costs, but may not use HSA funds for Medicare supplement insurance premiums.  Those that are receiving federal or state unemployment benefits, and those that use COBRA continuation coverage may use HSA funds to pay their health care premiums.  Also, qualified long-term care insurance premiums may be paid with HSA funds.

HSAs are not permitted for those who can be claimed as someone else's dependent for tax purposes, which automatically eliminates children, as well as dependent adults from having an HSA.  Those that are enrolled in Medicare also do not qualify to open an HSA.  If someone opens an HSA prior to becoming enrolled in Medicare, they must stop making contributions to the account, but still own the funds that remain in the HSA.  In addition, no other first-dollar medical coverage is allowed with an HSA, but exceptions are made for specific injury insurance, or accident, disability, dental care, vision care, or long-term care insurance.

The person who establishes an HSA:

• must first enroll in an HDHP.  Many health coverage providers offer these types of policies, that are specially tailored to be used with an HSA.
• decides how much to contribute to the account, up to a maximum of $2900 for individuals and $5800 for family coverage for the year 2008.  Those that are age 55 or older may make additional "catch-up" contributions of $900 for 2008 or $1000 for 2009 and beyond.
• permanently owns the funds in the account, even if they change jobs, switch health coverage providers, move to another state, change their marital status, or become unemployed.
• chooses where to hold HSA funds.  Banks, credit unions, insurance companies, and other financial institutions are permitted to be trustees or custodians of HSAs.  Any company that handles IRAs or Archer MSAs are automatically qualified to establish HSAs.
• may use HSA funds to pay for their own health care expenses, or use the funds to pay for health care needs of their spouse or dependent children, even if the spouse and children are not covered by the high-deductible health plan. 
• may choose to use the funds to meet the health plan deductible for whichever qualified health care expenses they want, whenever they want, as long as the HSA was established before the expense was incurred.  They can use it for current expenses or save it for future needs.  

The tax benefits of an HSA are enormous.  First of all, contributions, up to the allowable maximum, are tax-deductible.  You don't even have to itemize your deductions to receive this valuable tax benefit.  Also, your account contributions can grow with investments, and all of those earnings are tax-free.  On top of that, withdrawals for all qualified medical expenses are completely tax free.  You will have to pay income tax, plus a 10% penalty if you withdrawal funds from your HSA for non-qualified expenses, such as for cosmetic surgery or any type of non-medical expense.

Once you turn 65, the additional 10% tax penalty no longer applies.  The 10% tax penalty will also not apply if you become disabled or enroll in Medicare before the age of 65, but HSA funds must still be used for qualified medical expenses to avoid income tax for the amount withdrawn.

The benefits of an HDHP/HSA are great for the right person, but it is not a one-size-fits all.  The type of people who get the most from an HDHP/HSA are generally those that are fairly young and healthy, and rarely need medical care.  Those that have chronic or ongoing medical conditions often find they are better off with traditional medical coverage due to lower deductibles and the risk of depleting HSA savings before all their expenses are covered.  But, those with extremely high medication expenses may find an HDHP/HSA to work for them, since there are limits on your out-of-pocket expenses.  It's impossible to know for sure what your future medical bills may be, but try to compare likely expenses with both types of plans before you decide.

Another thing to consider, that while an HDHP normally has dramatically lower premiums due to the higher deductible, it is important that you are able to use that savings to fund your HSA.  People with less expendable income may find it difficult to build up their HSA, and be forced to pay higher expenses out-of-pocket.  Also, the higher deductible may make it harder on those with limited income to cover their deductible.

Consider your general health and your income situation before you choose to go with an HDHP/HSA.  If you are normally healthy, can regularly contribute to your HSA, and want coverage for catastrophic illnesses or accidents, then this type of plan can give you the most flexibility.  It's the perfect solution for the person who doesn't like to pay too much for coverage they rarely use, but who also knows that they must protect their health and their assets in case things ever change for them later.

Source:
The Department of the Treasury
www.treas.gov