Health Savings Accounts are fairly new since they were only signed into law in December of 2003. They are actually a better version of medical savings accounts or MSAs. An HSA is an account, similar to an IRA, devoted solely to health expenses and used with a high deductible health insurance policy. The idea is the high deductible insurance policies cost less and the money saved can be put into the HSA account. The funds are then used for medical fees until the deductible is met. Any unused portion remains in the account and earns tax-free interest. The insurance is used for medical problems that exceed the deductible of the policy.
There are many other tax advantages with an HSA: within a limit, money deposited into an HSA account is exempt from income tax; some states also make the money free from state tax; the money withdrawn to pay medical expenses is also tax free; HSA money is portable and can be moved with you when changing jobs; and again, money not used is allowed to stay in the account, earning interest that is not taxed. Also, after the age of 65, you can withdraw your money from the account for any reason.
That leads into a few disadvantages: until the age of 65, any money that is not spent on medical needs out of the account is added to the personís gross income for tax purposes and will generate an additional 10% tax. Also, you must always have a high deductible health insurance policy in place, with the deductible a minimum of $1000 for single coverage and $2000 for family coverage. There is also a stipulation that in the insurance policy, out-of-pocket expenses cannot be more than $5000 for individuals and $10,000 for families. One more negative issue: there could be potential problems for employers when initially working with the new HSA and the existing health plan.
In order to utilize a Health Savings Account, you must be under 65 years of age and you cannot be claimed as a dependent under anyone elseís tax return. You must have a high deductible health insurance policy at the time of deposits into the HSA account. You also cannot have other health insurance at the same time, except the following types: specific injury and accident, disability, long term, dental and vision.
There is no doubt that the new Health Savings Accounts will provide lower premiums for health insurance, be a great investment vehicle, and provide tax benefits for those who are able to use them. Just the ability to use pre-tax dollars to pay for medical fees is a huge improvement. Because the high premium of regular health insurance is a stumbling block to many peopleís ability to afford health insurance, the use of HSAs might be the edge they need to manage insurance now.