What Is Health Savings Account

What is a health savings account (HSA)?

If you're like most people, you've probably never heard of a health savings account (HSAs). Employers are likely to offer HSAs to employees as a solution to reduce health-care costs.

So, let's learn more about these special accounts and how they can help you save money on your medical bills.

What is a health savings account (HSA)?

Congress established health savings accounts in 2003, and they became law in January 2004. Their goal is to help you save for and pay for future medical expenses tax-free. In other words, you never have to pay taxes on HSA contributions, which significantly reduces medical costs.

What can you pay for using a health savings account (HSA)?

The money you save in an HSA can be used to pay for expenses that your health insurance does not cover, such as the deductible or co-payments (this is the portion of medical costs that you pay, as stated in your insurance policy). HSA funds can also be used for other types of health expenses, such as dental visits, prescription eyeglasses, hearing aids, or anything else that qualifies for the medical expenses tax deduction.

The complete list of allowable deductions can be found in IRS Publication 502, Medical and Dental Expenses. If you use HSA funds for non-qualified medical expenses, you must pay both income tax and a 10% penalty on the amount spent.

Who can open a health savings account (HSA)?

Why doesn't everyone have an HSA if they're so beneficial? The catch is that you can only contribute to an HSA if you have a type of health insurance known as a high deductible health plan (HDHP).

So, in order to open an HSA, you must first be enrolled in an HDHP. Furthermore, you cannot be enrolled in Medicare or claimed as a dependent on someone else's tax return in order to be eligible for an HDHP. However, you are eligible for an HSA whether you purchase an HDHP through your employer or on your own.

What is a high deductible health plan (HDHP)?

A high deductible health plan (HDHP) is precisely what it sounds like: a health insurance policy with a higher deductible than standard policies. A deductible is the amount of money you must pay before your insurance company will cover your covered expenses.

The following are the requirements for a health policy to be considered an HDHP in 2014:

• The annual deductible for an individual policy must be at least $1,250 or $2,500 for a family policy.
• The annual out-of-pocket expense limit for an individual policy is $6,350, or $12,700 for a family policy.

A high-deductible health plan can help you save money because the higher your deductible, the lower your monthly premiums. Depending on your medical requirements, this could be the key to saving money on health insurance.

How much can you contribute to a health savings account (HSA)?

For 2014, you can contribute up to $3,300 to an HSA as an individual or $6,550 as a family policy. You can make contributions until the filing deadline (usually April 15) following the tax year.

If you are 55 or older by the end of the tax year, regardless of whether you have an individual or family plan, you can save an additional $1,000.

What happens if you don’t spend health savings account (HSA) funds?

The benefit of an HSA is that there is no time limit for spending your contributions. Don't mix it up with a flexible spending account (FSA), which has an annual "use it or lose it" provision.

Unlike an FSA, your HSA balance is carried forward from year to year. This feature allows you to save money for the long term.

What happens if you cancel your high deductible health plan (HDHP)?

If you decide to cancel your HDHP, you can continue to use your HSA funds for qualified medical expenses tax-free indefinitely. You cannot, however, contribute additional funds to an HSA if you drop your HDHP.

The tax benefits of an HSA combined with the lower premium payments of an HDHP can help you save money on medical expenses. Furthermore, you'll have an appealing savings vehicle to put money aside for future health care expenses that you're likely to incur during retirement.