Guide To Health Insurance.org

One of the drawbacks of managed care health insurance plans like HMOs and PPOs
are the restrictions placed on treatment coverages that can limit your
healthcare options. Utilizing a Health Savings Account (HSA) is one way to put
more flexibility into your health insurance plan. Contributions you make to an
HSA are yours to spend on current and future medical needs, giving you the
opportunity to research your health options, consult your physician, and make
medically appropriate treatment choices without consulting your insurance
gatekeeper or case manager.

HSA Basics

An HSA is a tax-advantaged savings and investment plan, similar to an IRA. Funds contributed to the HSA remain in the account from year to year, and are not subject to any "use it or lose it" provisions. The plan participant owns and has responsibility for the HSA. You will often hear HSAs referred to as consumer-driven or consumer-choice programs. This is because an HSA allows the account holder to make decisions as to how the account funds will be used. HSA savings can be set aside to cover medical emergencies, or used right away to pay for routine medical expenses.

Money deposited to the HSA is tax-deductible. If your HSA is offered as an option with an employer-provided health plan, both you and your employer can make contributions to it. You can deposit up to the lesser of 100 percent of your health plan deductible, or the maximum legal limits ($2,700 for individuals, $5,450 families). Funds you deposit into the HSA are an "above the line" deduction on your federal income tax. In other words, even if you do not itemize, you will get the deduction. You incur no federal tax liability for funds your employer (or others) contribute to your HSA. Tax treatment of HSAs can vary by state, although the majority of states currently comply with federal guidelines and offer deductions for the accounts.

HSA Eligibility

There are some rules applied to eligibility for an HSA:

• Account owner must be an adult (children cannot have their own HSAs) who cannot be claimed as a dependent on someone else's tax return.
  
  
• Account owner must be a participant in a High Deductible Health Plan (HDHP). An HDHP is a health insurance plan with a deductible of at least $1,050/individual and $2,100/family.
  
  
• Account owner cannot have any other health "1st dollar" insurance coverage. 1st dollar coverage includes a primary health insurance plan other than the HDHP, Tricare, Medicare, FSA, and HRA coverage.

HSA Distribution Rules

HSA distributions are tax-free when used to meet medical expenses. Allowable expenses include most medical care and services, prescription and over-the-counter drugs, and dental and vision care. If you use account funds to pay for non-medical expenses, they will be subject to income tax and a 10 percent tax penalty. You cannot use the funds to pay for medical premiums except for:

• COBRA continuation coverage
  
  
• Long-Term Care Insurance
  
  
• Medicare premiums and expenses
  
  
• Short-term health insurance while receiving federal or state unemployment benefits

If you become disabled, or when you reach the age of 65, the 10 percent federal tax penalty for withdrawing HSA funds to pay for non-medical expenses no longer applies.