What is a Health Savings Account?
A health savings account (HSA) is a tax-exempt savings account available to individuals covered by high deductible health plans. The dollars that are deposited are used for future medical expenses. Health savings accounts are part of a larger trend known as consumer-directed or consumer-driven health care. HSAs and consumer-driven health care plans have been promoted by companies and the government as one way to help control health- care costs. The goal of an HSA is to reduce the money spent on health care by placing more of the responsibility on you to shop for health care.

 

How does a health savings account work?
It's like a savings account, only with an HSA the money can only be used to pay for medical expenses. The money in an HSA is owned and controlled by you, not your employer, health insurer or anyone else.

 

Is a health savings account right for me?
It's hard to say because your health situation is different from the next person's. In general, if you're a relatively healthy person and your dependents are healthy, an HSA might be a good option for you. This is because your annual health-care expenses may be relatively low, allowing you to save up for future health-care expenses. If you have a chronic condition that requires a lot of medical care and expense, an HSA might not be your best choice.

 

Who can set up a health savings account?
You can start a health savings account on your own through a bank or other financial institution, or your employer may offer a health savings account option.
To qualify for a health savings account, an individual:
• Must be covered by a high-deductible health insurance plan
• Cannot be claimed as a dependent on another individual’s tax return
• Cannot be enrolled in Medicare
• Cannot be covered by any medical plan that is not a high-deductible health insurance plan. However having dental, vision, disability and long term care insurance doesn't disqualify you from having an HSA.

 

What's a high-deductible insurance plan?
A high-deductible health plan is a health plan with lower premiums and a higher deductible for major care, like a hospitalization or surgery. In the high deductible plan, routine coverage like preventative care, or even visits to the doctor for an illness are generally not a part of the deductible. People may pay a small co-payment for these types of care visits. Prescriptions may also be purchased at a discount without needing to pay the deductible first.
The logic behind the high deductible plan is that people may be able to save money in premiums. However, if an emergency arises, and people require more than basic care, they are likely to meet the deductible. However, once the deductible is met, the insurance portion kicks in. It’s difficult to predict sudden illnesses or emergencies, so it is something of a gamble on the part of the high deductible plan purchaser to not have a HSA in place.

 

You can use your HSA to pay deductible expenses, copays associated with the plan, coinsurance payments and other noncovered health care expenses. 

 

One thing to consider very carefully is what medical expenses are covered by your high-deductible plan. If you receive care for something that's not covered by your high-deductible health insurance plan, the cost likely won't count toward your deductible.

 

What counts as a high-deductible health plan?
The Internal Revenue Service decides each year what amount qualifies as a high-deductible health plan. A good source of the most up-to-date information on those amounts is the Department of the Treasury's Web site. In addition, look at the plan's out-of-pocket maximum. This amount refers to the maximum amount you'd be required to pay out of pocket in the year for any medical expenses.

 

How are HSAs funded?
Tax-advantaged contributions can be made in three ways:
• the individual or family can make tax deductible contributions to the HSA
• the individual’s employer can make contributions that are not taxed to either the employer or the employee
• employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

 

How much money can you deposit annually into a health savings account?
The Internal Revenue Service decides how much you can contribute each year. A good source of the most up-to-date information on those amounts is the Department of the Treasury's Web site. The limits are indexed for inflation and usually change each year. Unspent money in your HSA can be rolled over each year.

 

Are health savings accounts similar to flexible spending accounts?
Yes, but one key difference is, unlike a flexible spending account, with an HSA you can keep (roll over) any unspent money each year. Also, HSAs are portable. Money put into an HSA is yours and can be taken with you if you switch jobs or retire. Also, it's important to know that in most cases you can't have both an HSA and a flexible spending account.

 

How do health savings accounts and high-deductible health insurance plans limit health-care costs?
The theory is you will be more cost-conscious while seeking medical care if the expenses come out of your pocket. Some doctors worry that the pressure to save the money in your HSA might cause you to avoid important preventive care. You should carefully weigh any health-care decision with your doctor and not let cost be the sole factor in your decision.

 

How do I find information regarding medical costs and quality so that I can make informed health care choices?
It can be challenging. Right now it's difficult to get reliable information regarding the cost and quality of treatment options, doctors and hospitals. Your employer or health plan may offer some Web-based tools, as well as access to someone by phone who can give you some basic information. The hope is that as health savings accounts and other consumer-directed health care options become more widespread, the access to information about cost and quality will expand.
Can you withdraw money from health savings accounts for nonmedical expenses?
If you withdraw funds from an HSA for nonmedical expenses before you turn 65, you have to pay taxes on it as well as a 10 percent penalty. If you take money out after you turn 65, you don't have a penalty, but you must pay tax on the money taken out. You can still withdraw money tax-free from an HSA for medical expenses after you turn 65.

 

 

The choice of whether to open a health savings account is not an easy one. So, before you open an HAS, carefully examine the potential savings and costs associated with one.

 

Here are some considerations when deciding whether to open a health savings account.

 

• Make sure your health plan is compatible with a health savings account. For example, deductibles and out-of-pocket spending limits must conform to the law.

 

• Ask about set-up, monthly or annual fees, as well as transaction or account closing charges.

 

• Check you investment options. Will your money be deposited into an interest-only account, or can you invest in stocks and mutual funds as well? Ask whether there are any minimum-balance requirements before you can invest.

 

• Find out how you gain access to your money–whether through checks or a debit card, for example.

 

• Ask about customer service. Can you call a toll-free number at any hour if you have questions? Is help available online? Are there other extras, like drug cost calculators?