Is a Health Savings Account Right For You?

If you have trouble saving, you may be happier with a more traditional type of health insurance plan with a lower deductibles and office copays. However if you can discipline yourself to bank your premium savings, especially with tax incentives to do so, you will find many advantages to combining a high deductible health insurance plan with an H.S.A.

How does a Health Savings Account (HSA) work to your advantage?

An HSA works with a high deductible health insurance plan. You can several advantages, including lower premiums on the higher deductible health plan vs. a low deductible health plan. The IRS does impose a limit to the amount of money you can deposit in your account every year, but under that limit, the money is all tax deductible. You can use the money to pay for your health deductibles and copays, and you can even use the money to pay for health related expenses that are not covered under your major medical plan. So you will have before tax dollars to spend on chiropractors, therapy, and vision care! Unlike a flexible spending account, unused HSA contributions roll over from year to year and accumulate to be used for future health care expenses. At retirement, you may withdraw your unused funds. You can see that setting up an account like this can have many advantages for a good saver.

Health Savings Account (HSA) Plans

A Health Savings Account is a special tax-sheltered savings account designated for medical expenses. An HSA allows you to pay for current qualified health expenses and save for future qualified medical and retiree health care expenses on a tax-free basis. Contributions and earnings are exempt from federal and most state income taxes, as well as Social Security (FICA) taxes. These tax savings also apply to all distributions when used to pay for qualified medical expenses. To be eligible for an HSA, you must be covered by a high deductible health plan, but cannot be covered by any medical plan other than a covered by any other health plan except for a high deductible health plan. However, dental and vision plans are not included in this restriction. You cannot be enrolled in Medicare, or claimed as a dependent on another person's tax return. Of course, you can use your account for your own dependents if they are enrolled in the high deductible health plan.

The main advantages with this type of health insurance and savings account are:

• Tax-advantaged: Neither contributions, earnings nor withdrawals (for qualified medical expenses) are taxed.

• Flexible: Money accumulates and remains with you (is non-forfeitable). The funds in the account can be used for non-medical expenses, but are then subject to ordinary tax plus a 10 percent penalty if you are under age 65. (However, this 10 percent penalty does not apply if the distribution occurs after disability or death.)

• Portable: Accounts move with you if you change employers or retire.

• A savings mechanism for future health needs: Unused contributions accumulate and can be "banked" for future medical expenses