Health Savings Accounts (HSAs) are a new way for consumers to pay for medical expenses. As of January 1, almost anyone with a qualified high-deductible health plan can also have a Health Savings Account. HSAs can save you money on your medical care now and provide a good way to save for future medical expenses. HSA funds can pay for expenses before you meet your deductible, as well as services not covered by your health plan, COBRA coverage during periods of unemployment, medical expenses after retirement, and long-term care expenses to name just a few.
HSAs may be established by any individual covered by a qualified high-deductible health plan. Qualified high-deductible health plans must have an annual deductible of at least $1,000 for individuals and $2,000 for families. Contributions can be made into the health savings account for the full amount of the annual deductible each year, to a maximum of $2,600 for individuals and $5,150 for families. You decide how much to contribute, how much of the account to use for medical expenses, and which medical expenses to pay from your account. You also choose whether to pay for medical expenses from the account or save it for future use. Even if you change jobs, your Health Savings Account is still yours.
You can keep the account even if you move to another state, and you can continue to keep it as you grow older. Regardless of where you get your health insurance plan, whether on your own or through your employer, your Health Savings Account funds are yours.
Unlike some other types of accounts, you don't lose HSA funds at the end of the year. Unspent balances remain in your account, earning interest, until you spend them on medical care. This is a strong incentive to spend wisely on your medical care, just like you do on other items you purchase. You'll want to shop around for the best value for your health care dollars.
Contributions to HSAs can be received from individuals, employers, or any combination of employer and individual. Employer contributions are excludable from income, and they may offer HSAs as part of a section 125(d) cafeteria plan. Individual contributions are deductible "above the line," which means a taxpayer doesn't have to itemize deductions to take the contribution as a deduction.
In terms of taxes, employer contributions are tax-free. Family member contributions are made on an after-tax basis, and investment earnings accrue tax-free. Distributions are tax-free if used for qualified medical expenses. Qualified medical expenses include:
- Amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease.
- Prescription drugs.
- Qualified long-term care services and long-term care insurance.
- COBRA continuation coverage required by federal law.
- Health insurance for the unemployed.
- Distributions made for any other purpose are subject to income tax and a 10 percent penalty, which may be waived in certain circumstances.
- The proposal clarifies that payments to medical service providers through the use of debt, credit, and stored-value cards don't create new reporting requirements for employers.
- HSA funds may also be used to pay for retiree health insurance premiums other than Medigap, including Medicare premiums. IBI