Health savings accounts (HSAs) provide a tax-advantaged way to save for and pay for your and your family's health care expenses. With an HSA, you set funds aside to pay for health care expenses that are not covered by your health care plan. You receive a tax deduction for amounts you contribute to the HSA, and amounts you withdraw to pay for qualified health care expenses are also free of tax. HSA account funds are invested, giving the HSA growth potential beyond the amount of the contributions you make. Amounts remaining in an HSA at the end of the year carry forward for use in subsequent years.
In order to be eligible to open an HSA, you need to be covered by a high deductible health plan (HDHP) and, generally, have no other health plan. The HDHP can be the coverage you have through your employer, or a policy that you've obtained on your own. An HDHP is defined as a plan with a minimum deductible of $1,100 for individual coverage/$2,200 for family coverage, and annual out-of-pocket maximums of $5,600 individual/$11,200 family (these amounts are for 2008 and are indexed annually for inflation). The plan can include coverage for preventive care that is not subject to the deductible, and still qualify as an HDHP.
Starting in 2007, your maximum annual HSA contribution is based on the IRS limit for your type of coverage, rather than your HDHP's deductible. For 2008, the max contribution for self only coverage is $2,900 and $5,800 for family coverage. Before 2007, the contribution could not exceed the deductible of your HDHP. Unlike many other tax breaks, the HSA contribution maximum does not phase out for individuals at higher income levels.
Because the premium cost for an HDHP will be less than that for a plan with a lower deductible, you can use the amount you save on your health plan premium to contribute to an HSA. Then, you can make additional contributions, if desired, up to the maximum amounts described above. Individuals who are age 55 or older are permitted to make extra "catch-up" contributions (until they enroll in Medicare).
What can you use your HSA for? HSAs were created to pay for health care expenses, and so long as a withdrawal is used for a medical care expense, it will be free of tax. "Medical care" is defined by Sec. 213 of the IRS Tax Code, and includes the types of health care services and supplies that you would expect: physician and hospital services, lab tests, prescription drugs, dental and vision expenses, and the like. A handy guideline as to what is considered a medical care expense is IRS Publication 502. An HSA cannot be used to pay the premium for the HDHP (unless you are on COBRA, or are receiving unemployment benefits).
The philosophy behind HSAs urges individuals to take more charge of, and to be more responsible for, how their health care dollars are spent. For example, instead of paying hefty premiums for extensive health care coverage you may not want or need, you buy a lower cost health plan with a higher deductible. This HDHP still will protect you from the cost of catastrophic health care expenses. However, because it does not provide first-dollar coverage for most care, you face decisions similar to those you make in other purchasing situations: Do I really need these services? If so, am I getting value and quality for the price I pay? In other words, for non-emergency situations, the HSA encourages you to shop around before spending your health care dollars.
If you think an HSA might be right for your situation, your insurance agent or broker can help you get started in setting one up. Many insurance companies sell HSAs that are packaged with an HDHP, and also provide the investment management of the HSA funds. However, any HDHP can be used, so long as it meets the qualification requirements set by law. HSAs also may be established through banks and other financial institutions.
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