What Is A Health Care Savings Account?

By Robert Fredricks Posted in Health Insurance News

A health care savings account is an alternative medical-care solution to traditional health plans. It’s consumer driven and focuses on individual responsibility with many tax advantages. Opening a health savings account requires first the enrollment in a High Deductible Health Plan (HDHP), the eligibility as established by the law, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

Tax Benefits Of A Health Savings Account

Like other retirement savings accounts offering certain tax benefits, a health savings account (HSA) is a medical savings account that has its own tax incentives. Contributions to the HSA are income tax deductible at the time of deposit. If contributions are made through salary reduction by an employer, payroll taxes are also waived for both the employer and the employee. Withdrawals for qualified medical expenses at any time are free of federal income taxes. Qualified medical expenses also include certain costs not covered under the account holder’s insurance plan, such as dental, vision, chiropractic, over-the-counter medications, other medical equipment, like hearing aids, and even transportation expenses related to medical care. Withdrawals can also be made for non-medical expenses for any reason, but they will subject to income taxes and incur a 10% penalty if made before the age of 65. The penalty is waived for the account holder who becomes disabled at the time of the withdrawal.

Other Features Of A Health Savings Account

There are statutory limits for maximum contributions. For 2009, the limits were $3,000 for individual and $5.950 for family. 2009 contributions does not end until April 15, 2010. The maximum contributions for 2010 increase to $3050 for individual and $6,150 for family. In order to make continuing contributions, an HSA-eligible high deductible insurance coverage must be maintained at all time. But any funds already in the HSA before losing the coverage remain available for use. With using the funds from a HAS to cover a HDHP’s high deductible in a catastrophic situation, 100% of the costs after deductible is covered by the insurance. This makes the total out-of-pocket medical expenses potentially less than that of traditional plans, as they likely have coinsurance after meeting deductibles. In the case of an employer-sponsored HSA, unlike making matching contributions to a 401K plan, an employee is not obligated to contribute to his or her employer-sponsored HSA. Also, not tied to any calendar-year uses, like a flexible spending account, funds not spent roll over year to year to accumulate and can be invested similar to investments in retirement accounts. Any investment earnings are also tax free inside the account.

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  4. What Are Archer Medical Savings Accounts For A Health Insurance Policy?
  5. Do Health Savings Accounts Really Save Money?

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