02 June 2012
Health Savings Accounts: What, How and Why

Health Savings Accounts (HSAs), created by federal law in 2003, are tax-advantaged personal savings accounts that are used for medical expenses. Congress’ objectives in creating these accounts were to encourage all individuals to have medical insurance, to save for current and future medical expenses, to reduce the overall costs of medical care, and to have individuals take ownership of managing their medical expenses. In many ways, HSAs serve the same purpose for medical expenses that IRAs do for retirement expenses.

An HSA works in conjunction with a High Deductible Health Plan
A “High Deductible Health Plan” (HDHP) is a specific type of health insurance policy that generally does not cover the first several thousand dollars of healthcare expenses.  HDHPs are usually available at lower costs than traditional health insurance policies. You must have an HDHP to be eligible for a HSA. HSA accounts are not available for those enrolled in Medicare.

In 2012, the deductible in the HDHP must be at least $1,200 for individuals or $2,400 for families, and the annual out-of-pocket expenses cannot exceed $6,050 for an individual or $12,100 for a family, including the deductible and co-payments (but not premiums).

Individuals can buy high-deductible policies on their own, or enroll in an HDHP through their employers.  Speak with your employer or insurance provider to see if your health insurance plan qualifies.

Benefits of a Health Savings Account
A HSA is managed by a financial institution.  The account holder makes tax-deductible contributions to the HSA, and uses funds from the HSA to pay medical expenses that are not covered by his HDHP. Funds within the HSA grow tax-free until withdrawn and are not taxed as long as they are used for qualified healthcare expenses. Distributions that are not used for qualified expenses are subject to regular income tax and a 10% penalty.

Using a Health Savings Account
HSAs are available from many financial institutions. They often work like an interest-bearing checking account with a debit card to use to pay medical expenses. HSAs are also available from some investment firms and mutual fund companies, which enable you to invest the funds within the HSA.

The amount you can contribute to a HSA and take as a tax deduction is set by the IRS. The limits are not impacted by your income level, type of income or whether you itemize deductions or not. For 2012, the limit is $3,100 for individuals and $6,250 for those with family coverage. In addition for 2012, an individual age 55 and above can make an extra contribution of $1,000. If both spouses are 55 or over, the extra contribution limit is $2,000.

Once you establish funds in a HSA, you take distributions from it to pay healthcare providers or to reimburse yourself for payments for qualified healthcare costs not covered by your insurance. The definition of qualified healthcare costs is similar to what the IRS uses for determining if an expense qualifies as an itemized deduction for your tax return.

Key Points to Consider

  • The combination of a HSA and a HDHP requires you to pay the first several thousand dollars of medical costs.
  • Compare the cost of a HDHP with your existing medical insurance plan. If you decide to switch to a HDHP, do not cancel your existing insurance until you are approved for the new plan.
  • Establish a HSA with an institution that provides the type of features you want. Consider the convenience of a debit card to pay expenses and how you want the funds invested, if applicable.
  • Keep good records, because they may have to be used to support the deduction on your tax return.
  • The tax rules can be complex, and you may want to consult your tax advisor to learn how a HSA would work in your situation.

Summary
The end result of this type of arrangement is that you have medical insurance to cover major expenses, you get a tax deduction for your contributions to the HSA, HSA funds grow tax-free, and you have funds available for current and future medical expenses that are not covered by insurance.

 

The information contained herein may not represent the views and opinions of Nevada State Bank or its affiliates.  It is presented for general informational purposes only and does not constitute tax, legal or business advice.

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