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What is a Health Savings Account?
A health savings account (HSA) plan is a new way to secure more affordable health coverage for you and your family while you save on taxes. Flexible, affordable and easy to use. The HSA is like a bank account you use to pay for routine health care – such as office visits, prescription drugs and lab tests. The money you put into your HSA will reduce your taxes for the year – similar to the money you save in a 401(k) plan. If your HSA is part of your employee benefits program, your employer may also contribute to the HSA. There are dollar limits on the amount that can go into your HSA each year. What you don’t spend from your HSA rolls over year-to-year for future health care needs. And if you retire or leave the company for any reason, you can take the balance in your HSA with you.
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How does an HSA work?
To participate in an HSA, you must be enrolled in a high deductible health plan (HDHP). AN HDHP is a comprehensive health plan with an annual deductible of at least $1,000 for an individual and $2,000 for two or more family members. Maximum annual out-of-pocket for in network expenses cannot exceed $5,100 for an individual or $10,200 for two or more family members. To participate in an HSA plan, you cannot be covered by a low-deductible plan that provides coverage for a benefit that is covered by the HDHP. There are two other requirements that you must meet in order to participate in an HSA. You cannot: 1) Be enrolled for Medicare, 2) be a dependant on another person's tax return. Money in your HSA plan can be used to pay for a variety of healthcare-related expenses ranging from routine physicals to prescription drugs.
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Contributing to your Health Savings Account:
When you participate in an HDHP; you set aside money to pay for eligible out-of-pocket expenses. Money can be contributed to your HSA by you and/or your employer up to the amount of the deductible to a maximum of $2,650 single/$5,250 family for 2005. Contribution maximums are based on monthly limits. For example, if you enroll in an HDHP on September 1 and your deductible is $1,200, you can only contribute $400 (4/12 of $1,200). If you are age 55 or older, you can make an additional contribution amount of $500 in 2004. The additional amount increases by $100 each year until it reaches $1,000 in 2009. Contributions to your HSA account are tax-deductible (tax-deferred if made by your employer), and withdrawals are not taxed as long as they are used to pay for qualified medical expenses.
Contributions that your employer makes to your HSA account are yours. There are no vesting requirements or forfeiture provisions. And unlike flex spending accounts, HSA plans do not have a "use it or lose it" requirement. Your account balance rolls over from year to year and may earn interest - tax free.
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Who is eligible for an HSA:
To be eligible for an HSA, the subscriber must be covered only by an HSA compatible, high deductible health plan and must not be a dependent on another person's tax return. Individuals age 65 and older are eligible to open an HSA as long as they have not elected Medicare, Parts A & B.
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What are eligible medical expenses which I can pay for with tax deductible HSA funds:
An eligible medical expense is defined as those expenses paid for care as described in section 223 (d) of the Internal Revenue Code. Below are two lists – deductible and non-deductible medical expenses which may determine whether an expense is eligible for an HAS reimbursement. The lists are intended to serve as a quick reference and are provided with the understanding that MSA Today is not engaged in rendering tax advice. For more detailed information, please refer to IRS Publication 502 titled, "Medical and Dental expenses", Catalog Number 15002Q. Publications can be ordered from the IRS by calling 1-800-TAX-FORM (1-800-829-3676). If tax advice is required please seek the services of a competent professional.
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Eligible Health Insurance Policy:
Permitted insurance includes worker's compensation, property insurance, insurance for a specific disease, such as cancer coverage, and insurance that pays a fixed amount per day of hospitalization. Coverage for dental, vision, long-term care, accidents, and disability are also permitted. Generally, you cannot use your HSA account to pay premiums for health insurance coverage. Exceptions include COBRA premiums, long-term care premiums or premiums payments that allow you to retain health coverage while you are receiving unemployment compensation.
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