Health Savings Accounts — The Details

Health Savings Accounts were created as part of the Medicare Prescription Drug, Improvement, and Modernization Act, signed into law in December 2003. They immediately drew praise and criticism.

The HSA is an attempt to lower the cost of healthcare in the United States by giving people control over it. They are considered part of a broader movement toward consumer-driven health plans. In the past, people enrolled in insurance programs, paid their premiums, and never thought twice about the actual cost of care.

The idea behind the HSA is to make people more responsible for their healthcare costs, while giving them tax relief to help pay for those costs. By giving people incentives to find affordable providers, supporters of HSAs hope that competition and “market pressure” will drive down healthcare costs.

HSA Tax Savings

With a Health Savings Account, you get these tax benefits:

• Your contributions are tax-deductible — you can deduct up to 100% of your health plan deductible from your Federal Income taxes

• Interest earned on your account is tax-free

• Employer contributions don’t count toward your income — so they aren’t taxed

• Unlike withdrawals from regular savings accounts, qualified HSA withdrawals are tax-free

Qualified HSA Withdrawals

You can use money in HSA account to cover your health plan deductible, as well as any co-payments or co-insurance after the deductible is met.

You can also use your HSA funds to pay for almost any medical-related expense. This includes:

• Dental care

• Eye care and vision exams

• Prescription drugs

• Over-the-counter medicines and pharmacy products such as bandages

• Travel and lodging for medical purposes

• Alternative therapies, such as acupuncture

Non-qualified withdrawals are subject to regular income tax and an additional 10% tax penalty. When you reach age 65, you can make non-medical withdrawals without incurring the penalty — meaning your HSA can be part of your retirement nest egg.

HSAs aren’t ideal for everyone. But more and more people are choosing HSAs as part of their healthcare options.

To find out more about your HSA options, talk to an insurance agent. Use our free service to get insurance quotes from local agents. Compare offers, ask questions, and get answers.