How Health Savings Accounts Work


Health Savings Accounts Explained

HSAs consist of two parts — first a qualified high-deductible health insurance policy with a low premium, and second, a tax-deductible investment account owned by you.

With an HSA, you are the one bankrolling a doctor’s visit for the sniffles or an annual checkup. You decide what you’ll pay out of pocket for — essentially acting as your own insurer — and what you want to submit as a claim through your high-deductible insurer.

The high deductible policy has a calendar year minimum of $1,100 for single policies, and $2,200 for family policies. That’s the amount you’ll pay out of pocket before your insurer starts picking up the tab.

There are also maximums to what you can contribute each year. For 2010 and 2011, calendar year maximum contributions are capped at $3,050 for single policies and $6,150 for family accounts. Account holders who turn 55 by December 31, 2010 can make an additional $1,000 contribution above and beyond the regular limits.

The investment account is yours and is 100% vested. It does not have to go to your insurance company or their selected partner bank. Contributions made by you and/or your employer are fully tax deductible to you.

Investment growth is not taxed while it is in the account. Withdrawals for eligible medical, dental and vision expenses are tax-free. You may withdraw for any non-medical expense anytime you like, but it will be subject to income tax plus 10% penalty (waived after age 65 or disability).

You can even use an HSA as a supplemental retirement account. Once you reach retirement age, you can use the funds for expenses not paid by Medicare, such as deductibles, co-insurance and even Part B and Part D premiums.

Perhaps you’ve heard that flexible spending accounts (FSAs) are ‘use or lose it’ each year and you waive the right to any unused funds. Well, HSAs are ‘use it or keep it’ – the balances in your HSA will rollover from one year to the next.

Special thanks to Health Savings Administrators for providing research material.

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