A Health Savings Account (HSA) is a tax-advantaged medical savings account available to people who are enrolled in a High-Deductible Health Plan (HDHP).
A High-Deductible Health Plan is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. It is sometimes referred to as a catastrophic health insurance plan.
The combination of high-deductible insurance and HSAs can reduce medical spending by encouraging consumers to shop around for care. The funds contributed to the account are not subject to federal income tax at the time of the deposit and may be used to pay for qualified medical expenses at any time without federal tax liability.
Funds may be withdrawn at any time and remain the property of the policyholder, even if they end their insurance coverage.
Withdrawals are not subject to income taxation if made for qualified medical expenses which include deductible and coinsurance or co-payments, as well as many other expenses not covered under medical plans such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; and transportation expenses related to medical care. Non-prescription, over-the-counter medications are also eligible.
There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks and some allow for a reimbursement process similar to medical insurance. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 10% penalty. The 10% tax penalty is waived for persons who have reached the age of 65 or have become disabled at the time of the withdrawal.
Here are some tips for using a health savings account and high-deductible insurance plan:
- Be sure you can afford the worst case scenario for deductibles, co-insurance and out-of-pocket maximum limits, as well as the monthly premium. Use online tools and calculators, if available.
- Fund the health savings account early for tax benefits and to offset high expenses; avoid using for small expenses.
- Check bills and explanations of benefits to make sure you are charged the correct, discounted in-network rates.
- Keep meticulous records. Don’t buy non-qualified items with the same check or debit card as qualified medical expenses to avoid jeopardizing reimbursement and tax benefits.
- Consider insurance plans that cover checkups and immunizations at 100%.
- Fees, minimum balances and investment options vary widely.
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