What Is An HSA?

Whether you are educated or uneducated, twenty or forty, the lingo used in the health insurance industry can get confusing and if you don’t understand what you are signing up for the chances are that you aren’t going to get the maximum benefits available to you. Terminology can become particularly overwhelming if this is your first endeavor in to finding health insurance coverage on your own. There are PPO’s and HMO’s, lifetime limitations, co-pays, prescription coverage, routine care costs, maternity coverage (or lack thereof,) coinsurance…and the list goes on and on leaving your brain feeling slightly frazzled. One of the terms that seems to crop up quite a bit and leave quite a lot of confusion in its wake is “HSA” or a “Health Savings Account.” When surveying the variable insurance policies that are available to you, you will notice a trend in the more affordable policies. Affordable policies generally offer high deductibles, high or non-existent co-pays, high coinsurance costs or HAS options. By nature health insurance plans that offer an HSA are available to high deductible health plan enrollees – that is individuals who pay for health insurance on a plan that has a high deductible (cost that must be met before the insurance company begins paying for medical cost. Deductibles are applied yearly and after deductibles are met co-insurance policies kick in.)

What Are HAS’s?

Health Savings Accounts are medical savings accounts that carry certain tax advantages, in that money can be withdrawn from the HSA to cover qualifying medical expenses without any penalty being assessed. Funds deposited in to an HSA are also exempt from Federal income tax when they are deposited in to the account, and when they are spent on qualifying medical expenses they can be done so without federal tax liability or penalty. What qualifies as a qualifying medical expense varies from year to year such as a change in 2011 that prohibited the use of HSA funds for the use of over the counter medications unless a prescription for the medication was written by a doctor. HSA’s are intended as a way for individuals with high deductible health insurance plans to offset the high deductibles they will have to pay in the case of a medical situation arising.

How Do HSA’s Work?

Money is deposited in to an HAS by the policy holder, the policy holder’s employer or anyone else wishing to contribute money to the health savings account. Money deposited in the account may only be utilized by the policy holder for qualified medical expenses and as such it becomes the property of the account holder as soon as it is deposited. There are regulations imposed on the maximum amount of money that can be deposited in to an HAS each year, this limit tends to change from year to year. For the 2011 year the HSA statutory contribution amount (the maximum amount that can be contributed) for an individual plan is $3,050 and for a family it is $6,150. For seniors of age 55 or older are allowed to pay HAS “catch-up” contributions to allow for the accumulation of more funds due to a shorter amount of time to compile funds in the account than younger account holders.

Benefits of an HSA

The exemption of deposits in to an Health Savings Account from income tax at the time of deposit is just one benefit of beginning an HSA. Additionally the withdrawn funds used for legitimate medical costs are also exempt from taxation, but again, this is not the only benefit of establishing an HSA. Unlike other types of accounts like the “flexible spending account,” the money deposited in to an HSA continues to roll over from year to year resulting in an accumulation of funds for medical purposes. HSA’s also differ from HRA’s or Health Reimbursement Arrangements in that HSA’s are owned by individual account holders whereas HRA’s are company owned accounts. Another benefit of money placed in to an HSA is that it can be utilized for investing although there are limitations as to how this process works.

Investing With HSA Funds

Money in an HSA fund must be invested using a trustee service. It is up to you to decide upon the trustee service that you utilize for investing; however, employers sometimes have a custodian that they prefer. When investing through a trustee service, funds are transferred directly through your HSA account to the connected trustee service. All funds from the investment account are channeled directly back to the HSA account in order to accurately report data to the IRS. Money that is moved from the HSA account is not covered by FDIC insurance and if invested poorly the principal funds can be lost.

Withdrawing From an HSA

Funds can be taken out of an HSA account at any time for qualified medical expenses. Medical expenses that have not been reimbursed by a high deductible health plan are also qualified as medical expenses that can be reimbursed through the HSA. HSA funds may also be utilized to cover deductible expenses, coinsurance expenses, co-payment expenses, dental, vision and chiropractic care and other out of pocket medical expenses not covered or only partially covered by a high deductible plan. ALL expenses covered by HSA funds must be intricately documented in order to prove to the IRS that funds were utilized for legitimate medical expenses. If adequate documentation is not kept to prove the usage of HSA funds penalization is similar to the system used with IRA’s (Individual Retirement Accounts.) So for an HSA, funds that are withdrawn for non-medical purposes are penalized  by the IRS with a 10% penalty fee; however, funds that are withdrawn from the HSA for non-medical purposes after the account holder passes retirement age as long as taxes are paid on the non-qualified costs.

Depending upon the HSA account funds can be taken out to cover medical expenses using checks, debit cards or via reimbursement. These methods of withdrawal are determined by the HSA holding bank.

The Long and Short of It

HSA’s can be extremely beneficial for individuals that have no option for low deductible health plans since the contributions to health savings accounts can be utilized to offset any of the high costs associated with high deductible health plans (HDHP’s.) HSA’s may not be the right choice for everyone; however, particularly if you are able to afford a low deductible health insurance plan or if you are unable to make any contribution to the health savings account. Not everyone agrees with the use of HSA’s; however, because many people feel that the tax benefits of HSA’s are unfair and that all individuals should receive tax free medical expenses whether or not they have an HSA. The fact remains though, that health savings accounts offer a valuable resource to assist individuals who are unable to enroll in low deductible health insurance plans.