What is an HSA?
Health Savings Accounts are savings accounts that allow individuals to pay for qualified out-of-pocket medical expenses using pre-tax dollars. Unlike more traditional health care accounts, the funds in an HSA belong to the individual, not the employer or the insurance company, and travel with the individual. In order to take advantage of this tax deferred savings new benefit, individuals must purchase a specific type of health insurance coverage called a High Deductible Health Plan (HDHP).
What is an HDHP?
An HDHP is a different type of health plan. Under an HDHP individuals are covered for large expenses and pay for their day-to-day expenses, usually up to the amount of the deductible. In order to meet the requirements an HDHP must have a deductible of at least $1,100 (IRS 2007 and 2008 limits) for individuals or $2,200 (IRS 2007 and 2008 limits) for families plus certain total out-of-pocket expense maximums.
What are the benefits of an HSA
An HSA is very similar to an IRA in that:
- Pre-tax dollars can be used to pay for qualified medical expenses
- You are in control of more of your health care decisions
- Funds left in an HSA can grow, tax deferred
- Your account stays with you even if you change employers
- After age 65 you can withdraw your funds and they are only taxed as ordinary income
What expenses are qualified medical expenses?
Qualified expenses include most normal medical expenses such as:
- Doctor visits
- Prescription and over the counter drugs
- Dental services
- Vision care (including contact lenses, glasses and Lasik surgery)
- View a complete list of qualified medical expenses.
How do I open an HSA?
Opening an HSA is very similar to opening a checking account. All you need to do is complete an HSA Application which asks basic information such as, name, address, social security number, date-of-birth, phone number, driver's license and e-mail.
You may also want to authorize a co-signer on your HSA. An HSA is an individual account and cannot be held jointly; however, we allow for co-signers. An HSA can be used for the benefit of other eligible members in the family (regardless of their insurance coverage) so it is often beneficial for anyone opening an HSA to allow their spouse to have signing privileges. It generally makes sense to only open one HSA per family rather than split the contribution between two spouses’ accounts.
As a custodial or trust account, you are permitted and encouraged to name a beneficiary for your HSA at the time you open it. At the time of death, a spouse beneficiary will have the option to treat the account as his or her own HSA and continue to use the account as an HSA. A non-spouse beneficiary will not be allowed to keep the assets in an HSA and will have to include the amount in the HSA as income. If you do not name a beneficiary, any balance remaining in your HSA will go to your estate.
How much can I contribute to an HSA?
Individuals are allowed to contribute up to $2,850 in 2007, or $2,900 in 2008.
Families are eligible to contribute up to $5,650 in 2007 or $5,800 in 2008.
Confused? Don't worry, our HSA Contribution Worksheet walks you through the calculations.
How do I make contributions?
You will generally open your HSA with an initial contribution. This could be a check, an ACH withdrawal from your checking account or a contribution from your employer made payable to the HSA custodian or trustee. You may then want to set up an automatic deposit plan for future contributions. An automatic monthly deposit allows for you to fund your HSA on a regular basis without any hassle. If you prefer, you can make your full annual contribution all at once. Your employer may also make contributions on your behalf or as a benefit to you.
How do HSAs compare to FSAs and HRAs
Health Savings Accounts:
- Financed with employee pre-tax dollars and/or employer contributions
- Distributions for qualified medical expenses are tax free (employees required to substantiate)
- Account balance belongs to employee and rolls-over from year to year
- Amount withdrawn after age 65 taxable as ordinary income
Flexible Spending Accounts
- Financed with employee pre-tax dollars
- Distributions for qualified medical expenses are tax free (compliance determined at time of payment)
- Account balance does not roll from year to year; use it or lose it
Healthcare Reimbursement Accounts
- Financed with employee pre-tax dollars and/or employer contributions
- Distributions for qualified medical expenses are tax free (compliance determined at time of payment)
- Unused funds may be carried to future years
