What You Need to Know About a Health Savings Account
An HSA - or Health Savings Account - is a tax deductible savings account that some individuals can establish and use to pay for qualifying medical expenses. Health Savings Accounts have been available since January 1, 2004 for American citizens who are under the age of 65 and meet other qualifying conditions. To goal of HSA plans is to help participants save money by reducing their taxes each year and providing them with an investment vehicle that they can use to grow their wealth.
Who is Eligible for an HSA
Americans may be eligible to participate in HSA programs if they are under the age of 65, live in a state that accepts Health Savings Accounts, and have a qualifying insurance plan. Health Savings Accounts are especially popular methods of paying for health expenses amongst sole proprietors and small business owners who provide HSA plans for the employees along with high deductible insurance plans.
Not everyone will be eligible to participate in an HSA program, as participation in an HSA program requires that individuals meet certain requirements, such as having a high-deductible insurance plan. Therefore, some individuals, such as individuals who receive low deductible insurance plans through their employers, may not qualify to participate in an HSA program.
How Health Savings Accounts Work
An HSA plan is very similar to an IRA plan. Like with an IRA plan, individuals invest money into their Health Savings Accounts on an annual basis with annual maximum contribution allowances. An HSA is tax-deductible, which means that the money that an individual invests into his or her HSA is deducted from his or her annual tax requirement. Because individuals can deduct the dollars that they contribute to their Health Savings Accounts from their gross incomes, they can, essentially, be getting tax-free money to pay for medical expenses.
It should be noted that in order to have an HSA, individuals need to make a principal deposit into the savings account, which requires that the individual have some money to begin the account.
Like with an IRA, individuals can then use their Health Savings Accounts in order to make investments and grow their savings account. If individuals choose to invest their money, they can invest in mutual funds, CDs, stocks, and other traditionally-accepted investment vehicles. If they choose not to invest their money, they can choose to keep their money in the savings account in the same way they would manage their money in any other type of traditional savings account.
As HSA funds grow due to interest accumulation or as a result of investments, the growth on those funds is tax-deferred. The funds are not taxed at all as long as they are used to pay for qualifying medical expenses.
However, HSA participants can choose to withdraw funds from their Health Savings Accounts for any purpose, including, but not limited to paying for medical expenses. If an individual withdraws money from an HSA for reasons other than to pay for medical expenses, then the financial gain on those funds is tax-deferred until the withdrawal.
While HSA participants need to have high deductible insurance plans in order to establish an HSA, participants will have HSA premiums that are lower than fully-insured plans with co-pays.
Once you establish an HSA, the funds that you contribute to the HSA will not go away, even if you change insurance plans. In the event that you buy a different health insurance plan that no longer qualifies for HSA coverage down the road, you can still use the funds from your HSA to pay for qualifying medical expenses (even if you no longer have the qualifying insurance plan). However, without the qualifying insurance plan in place, you will no longer be able to contribute funds to your HSA.
What are Allowable Medical Expenses?
Many medical expenses will qualify for coverage under an HSA plan. These medical expenses include dental check-ups, vision care, doctor's visits, chiropractic treatment, alternative care like acupuncture or homeopathy, and much more.
Individuals interested in opening an HSA need to first ensure that they have a qualifying high deductible insurance plan and meet other qualifying conditions. Some individuals also find it helpful to shop around to different banks and brokers for the HSA plan with the lowest fees. In order to be sure that they get the right arrangement for their unique situations, many individuals and businesses find it optimal to work with a qualified insurance agency in order to get the best insurance and HSA plans possible for their specific health and lifestyle needs.
