Health Savings Accounts
From LoveToKnow Insurance
Nowadays, with the cost of medical care, health savings accounts are almost a necessity. In 2003, a Medicare bill introduced Health Savings Accounts to help people save tax-free money for future medical and health expenses.
How Health Savings Accounts Work
Health savings accounts (HSAs) are meant to be an alternative to traditional health insurance. With these accounts, one can deposit or have money deposited into a tax-free account. Funds in this account are used to pay for current and future medical expenses. Contributions to health savings accounts can be made in one of three ways:
- An individual or family can make tax-deductible contributions to their own account.
- An individual’s employer can make tax-free contributions to the HSA.
- An individual can contribute tax-free allowances through an employer sponsored cafeteria plan.
Any amounts that are contributed to an HSA belong to the account holder. Just like an IRA, funds in health savings accounts can grow through investments, such as stocks, bonds, mutual funds, and certificates of deposit. What’s nice about an HSA is the fact that you own and control your own money. Not only can you decide what types of investments to make, you can make decisions on how the money should be spent. This makes the plan very unique, because with a regular Health Insurance Plan, it is your insurer who makes all of these decisions.
Obtaining Health Savings Accounts
In order to take advantage of health savings accounts, you must first be covered by a High Deductible Health Plan (HDHP). Sometimes called a “catastrophic” health plan, a HDHP is much less expensive than traditional Medical Insurance. This is because it generally does not pay for the first several thousands of dollars in health care expenses (also known as your deductible). Of course, after a certain point, medical expenses will be covered by your HDHP.
If you want to make sure you will have money to pay for the initial medical expenses that will not be covered by your HDHP, you can open an HSA at a bank, credit union, insurance company, or other approved company. Though it does not cost anything to open an HSA, as of 2006, your HDHP minimum deductible must be at least $1,050 (individual coverage) or $2,100 (family coverage).
Making Contributions
With an HSA, you are only allowed to make contributions equal to the amount of the deductible on your HDHP. For example, if you choose a HDHP that has a deductible of $1,200, you may not deposit more than $1,200 into your HSA in a single year. The exception to this rule applies only to those who are age 55 or older. Individuals in this age group are allowed to make “catch-up” contributions until they sign up for Medicare.
When making contributions to health savings accounts, you can generally deposit funds regularly or in one lump sum. However, some banks, credit unions, insurance companies, and other account custodians may set minimum contribution and/or balance requirements. Before opening an HSA, you should make sure you understand any requirements that are set in terms of contributions. This can save you from a huge headache down the road.
Summary
Health savings accounts can seem intimidating, but they can be advantageous due to the tax-savings they offer. With this insurance option, you can provide yourself and your family with affordable medical insurance. To learn more about how health savings accounts can benefit you, visit the U.S. Treasury website.
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