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Health Savings Account Tips

Americans spend a lot for health care. The total tab for health care in 2008 exceeded $2.3 trillion - nearly $7,700 for every man, woman and child in the country. Health care expenditures are responsible for more than 16 percent of the country's gross domestic product, according to the Henry J. Kaiser Family Foundation. There are numerous plans and proposals for curtailing rising health care costs, including expanding the accessibility of health savings accounts to ordinary individual taxpayers.

  1. What is a Health Savings Account?

    • A Health Savings Account, sometimes referred to as an HSA, is a two-component, tax-advantaged plan for putting consumers back in the loop when it comes to managing their own health care. Congress signed the law making these accounts available in December 2003. HSAs combine a tax-exempt individual savings account with a high-deductible health insurance policy. Medical expenses are paid for out of funds from the savings account with pre-tax dollars. These expenses count toward satisfying the deductible on the health insurance policy. If a catastrophic medical situation arises, the policyholder is covered by his high-deductible health insurance policy.

    Restrictions

    • You cannot have an HSA if you are eligible for Medicare. You cannot have a personal HSA if you are someone else's dependent, although dependents may be covered under a family HSA plan. You cannot be covered by another health insurance policy that is not a qualified, high-deductible policy. HSAs may not be the best choice for all consumers. You should carefully weigh all your options prior to establishing an HSA.

    Benefits

    • HSAs are sometimes referred to as medical individual retirement accounts (IRA), because contributions to the savings account portion of these plans are tax deductible up to the maximum limits established by tax law and regulations for the current tax year. You can deduct these contributions when you file your federal income tax return whether you elect to itemize or take the standard deduction. HSAs do not have a use-it-or-lose-it feature, like flexible spending accounts. Funds contributed to the HSA savings account remain in the account from year to year until they are needed, and any interest earned on these funds accrues tax free. Distributions that are used to pay for qualified medical expenses are not considered taxable income. HSAs are portable personal accounts that you can take with you when you change jobs. The high-deductible insurance policy kicks in once the deductible is met, which protects you against catastrophic loss.

    What to Look For

    • Health Savings Accounts are not all created equally. You should should shop around to get the best combination of plan features for your situation. HSAs are held by a trustee that may be an insurance company, a bank or thrift institution, a mutual fund company or any other organization approved by the Internal Revenue Service as a trustee for individual retirement arrangements. The trustee handling your HSA should be accessible when you need it. Some trustees provide checks or debit cards so you can access the funds in your account immediately. Always ask about any fees associated with the operation of your HSA, including transaction fees and maintenance fees. Funds contributed to an HSA may be considered either savings or an investment. Since these funds are allowed to grow tax-free, you should consider the types of investments your trustee will allow you access to. Trustees that offer high-yield money market funds or conservative stock mutual funds in addition to passbook savings accounts may provide greater flexibility for your investment needs.

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