Why Health Savings Accounts are Great Financial Tools

Health Savings Accounts (HSAs) were created by the Medicare bill and signed by President George W. Bush on December 8, 2003. The new Health Savings Accounts are considered to be the next generation of medical savings accounts. These savings accounts were designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. Typically called a High Deductible Health Plan (HDHP) with a Health Savings Account or a Health Reimbursement Arrangement (HRA), these plans provide traditional medical coverage and a tax-free way to help individuals build savings for future medical expenses. The High Deductible Health Plan/Health Savings Account allows greater flexibility and discretion over how one uses their health care benefits.

The High Deductible Health Plan features higher annual deductibles than other traditional health plans and depending on the plan you choose, you may have the choice of using in-network and out-of-network providers. By using the in-network providers you're able to save more money. The annual deductible must be met before the plan pays benefits, with the exception of preventive care. Preventive services are typically paid as the first dollar coverage or after a small deductible or co-payment. A maximum dollar amount, up to $300 for example, may apply.

After enrollment in a High Deductible Health Plan, the health plan determines if you are eligible for a Health Savings Account or a Health Reimbursement Arrangement. Those enrolled in Medicare are not eligible for a Health Savings Account. The plan automatically credits a portion of the health plan premium into your Health Savings Account or Health Reimbursement Arrangement every month. The deductible may be paid with funds from either account and if you have a Health Savings Account, you may choose to pay your deductible out of pocket so your savings account is able to grow.

Health Savings Accounts are available to individuals covered by a high deductible health insurance plan. The annual deductible must be at least $1,000 for individual coverage and at least $2,000 for family coverage. Health Savings Accounts are considered to be a significant improvement over previous savings vehicles as they were limited to employees of small businesses and the self-employed and required health insurance policies to have much higher deductibles.

Contributions made to Health Savings Accounts are deductible whether the taxpayer itemizes or not. However, contributions by an employer are not included in the individual's taxable income. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy's annual deductible. Individuals over the age of 55 may also make extra contributions to their accounts and enjoy the same tax advantages. Any interest and investment earnings generated by the account are also not taxable while in the Health Savings Plan.

The amounts distributed by a Health Savings Accounts are not taxable as long as they are used to pay for qualified medical expenses. Health Savings Accounts funds may be used to cover the deductible for health insurance and any co-payments for medical services, products, or prescriptions. Health Savings Accounts funds may also be used to purchase over-the-counter drugs and long term care insurance or to pay health insurance premiums during any period of unemployment. Health Savings Accounts are portable which allows an individual to not be dependent upon a particular employer to enjoy the advantages of having a Health Savings Account. The Health Savings Account is owned by the individual and not the employer so if the individual changes jobs, the Health Savings Account goes with the individual.

Federally qualified Health Service Account contributions can be deducted from an individual's gross income on their federal tax return, plus many states also allow the deduction from state income taxes. A Health Savings Account combines high deductible health insurance with a tax-favored savings account. The money in the savings account helps pay the deductible and once the deductible is met, the insurance starts paying. Any money left in the savings account accumulates interest and is yours to keep.

To reap the benefits of a Health Savings Account, the law requires that the savings account be combined with high deductible health insurance. This high deductible health insurance costs less than the traditional $250 or $500 deductible coverage as the insurance company doesn't have to process and pay claims for routine or low dollar medical care. Health Savings Accounts are a great way for consumers to save money, have free options about medical spending, and put discipline into the health care payments system.