Understanding Health Savings Accounts

Health Savings Accounts Explained

There are many health insurance plan options available. One often-misunderstood plan is HSA’s often referred to as Health Savings Accounts. Information released last year from the Americas Health Insurance Plan (AHIP) indicates the use of HSAs among American’s are increasing year over year. (AHIP) reported the number of people covered by an HSA-eligible HDHP more than doubled between January 2008 to January 2012 (increasing from 6.1 million to 13.5 million) While many Americans are moving over to using HSA accounts, many are still confused about what they are and how to use them.

In general a Health Savings Account is an account established for individuals who are covered by a high-deductible health plans. Health Savings Account provides tax-advantages to individuals who are currently employed in the United States.  The funds an employee contributes to a Health Savings Account are not subjected to federal income tax at the time of contribution. Each year funds not used are rolled over to the following year. Each Health Savings Account is owned and managed by the individual contributor, and held in a third party bank. The funds of an HSA account are to be used for qualified medical expenses.

How Health Savings Accounts work

Deposits

Both contributors and policyholders are able to make deposits to an HSA account. All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not used each year carries over into the next year. If the policyholder ends their HSA-eligible insurance coverage or changes jobs while he or she loses the eligibility to deposit additional funds into the account, the funds already in the HSA remains available for use.

The deposits to a Health Savings Account can be made for a given tax year until the deadline for filing your income tax returns for that year. The typical deadline is April 15. The IRS defines the annual maximum contribution amount  which often varies on a yearly basis. The contributions to an HSA from both the employer and the employee count toward the annual maximum.

Withdrawals & Usage

There are multiple ways to use funds in an Health Savings Account. Many Health Savings accounts include a debit card, and some allow for a reimbursement of payments through receipt submissions. There are no limits on the amount of funds that can be withdrawn from an HSA accounts as long as there is sufficient funds available. Any funds that are withdrawn for non-qualified medical purposes can subject to income taxes and a 20% penalty. Note: If the recipient is disabled or has reached the age of 65 the 20% tax penalty is waived. for persons who have reached the age of 65 or have become disabled at the time of the withdrawal.

Starting on January 1, 2011 as part of changes of the Patient Protection and Affordable Care Act, HSA and FSA (Flexible Savings Account) funds are no longer applicable for the purchase of over-the-counter drugs without a doctor’s prescription.

Dead lines for Reimbursements

Unlike and FSA account there are no deadlines to use the funds or reimburse one’s self for past qualified medical expenses. There are individuals that take advantage of this tax benefits by choosing to setup and HSA account and still choose to pay their medical expenses out of pocket. This money is then taken out years later for any reason up to the value of the receipts.

Death of Account Holder

If an account holder passes away, the funds currently available in the Health Savings Account will be transferred to the beneficiary listed on the account. There is no tax fee associated with the account transfer.

Benefits of a Health Savings Plan

Roll over benefits Health Savings Account when compared to other accounts including Flexible Spending Accounts(FSA),  HSAs are more advantageous as usage of the account is not tied back to a specific calendar year. The funds are rolled over for future medical expenses or may be used to reimburse qualified expenses from prior years as long as the expense was qualified under an HSA plan at the time that the expense was incurred.

Catastrophic Coverage In catastrophic situations, the maximum out-of-pocket expense liability is often less than that of a standard health plan. In many situations a qualified HDHP will cover 100% after the deductible, involving no coinsurance.

Tax Benefits HSAs provides the flexibility to use pre-tax dollars to pay for qualified medical expenses not covered in standard insurance plans, which may include dental, orthodontic, vision, and other prescription drugs.

Savings Benefits:  Due to the roll over benefits a Health Savings Account can accumulate significant savings over time. These dollars can later be used for health care tax free or put toward retirement on a tax-deferred basis, additionally having a health savings plan is the only health insurance plan that have the ability to gain value during the year based on how the funds are invested by the bank.

Year

Contribution Limit
(Single)

Contribution Limit
(Family)

Catch-Up Contribution
(55 or older) (Single and Family)

2004

$2,600

$5,150

$500

2005

$2,650

$5,250

$600

2006

$2,700

$5,450

$700

2007

$2,850

$5,650

$800

2008

$2,900

$5,800

$900

2009

$3,000

$5,950

$1,000

2010

$3,050

$6,150

$1,000

2011

$3,050

$6,150

$1,000

2012

$3,100

$6,250

$1,000

2013

$3,250

$6,450

$1,000

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