Definition
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High-Deductible Health Plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. HSAs are designed to help individuals save for future medical expenses on a tax-free basis.
Detailed Explanation
The HSA was established by the Medicare Prescription Drug, Improvement, and Modernization Act, signed into law by President George W. Bush on December 8, 2003. To qualify for an HSA, an individual must be covered under a high-deductible health plan (HDHP) and must not be covered by other health insurance (with some exceptions).
Key features of an HSA include:
- Tax-Free Contributions: Contributions to an HSA can be made pre-tax through payroll deductions (if the employer offers this service) or as a tax-deductible contribution.
- Tax-Free Earnings: The interest and investment earnings on the funds in the HSA grow tax-free.
- Tax-Free Withdrawals: Withdrawals from an HSA are tax-free when used for qualified medical expenses.
- Contribution Limits: Contribution limits are set annually by the IRS. In 2011, the limit was $3,050 for an individual and $6,150 for a family, with an additional $1,000 catch-up contribution allowed for those 55 years or older. These limits increase with inflation.
- Portability: The account holder owns the HSA, which means it is not dependent on their employment status. It remains with the individual even if they change jobs or leave the workforce.
- Rollovers: Unlike Flexible Spending Accounts (FSA), the unspent balance in an HSA rolls over year to year.
- Qualified Medical Expenses: Funds can be used to pay for a wide range of medical expenses, including prescription drugs, doctor visits, dental care, and vision care.
Examples
-
Individual Coverage: John owns a high-deductible health plan (HDHP) and opens an HSA to cover future medical costs. Over the year, he contributes $3,050 to his HSA. The money grows tax-free, and he uses it to pay for a surgery, ensuring the withdrawals are tax-free as well.
-
Family Coverage: Jane has an HDHP covering her and her family. In 2011, she contributes $6,150 to her HSA. Being 55, she adds an additional $1,000 as a catch-up contribution. She uses her HSA funds tax-free to pay for dental braces for her child.
Frequently Asked Questions
What is a High-Deductible Health Plan (HDHP)?
A High-Deductible Health Plan (HDHP) is a health insurance plan with a higher deductible than a traditional insurance plan. It qualifies for an HSA and generally has lower premiums.
Can I use my HSA to pay for non-medical expenses?
Yes, but if withdrawals are used for non-medical expenses before age 65, they are subject to ordinary income tax and a 20% penalty. After age 65, there is no penalty, though withdrawals are subject to regular income tax.
What happens to my HSA if I no longer have an HDHP?
You can no longer make contributions to the HSA, but you can continue to use the funds for qualified medical expenses.
Are there income limits to qualify for an HSA?
No, there are no income limits that restrict eligibility for an HSA.
Can HSA funds be invested?
Yes, many HSA accounts offer investment options similar to 401(k) plans, including stocks, bonds, and mutual funds.
Related Terms
- Flexible Spending Account (FSA): A special account individuals put money into that they use to pay for certain out-of-pocket health care costs. The money must be used within the plan year.
- Catch-Up Contribution: An additional allowable contribution to retirement accounts and HSAs for individuals aged 55 or higher.
Online References
Suggested Books
- “Health Savings Accounts for Dummies” by Stuart Stephen.
- “The Complete Idiot’s Guide to Medical Savings Accounts” by Carolyn Bauer.
Fundamentals of Health Savings Accounts (HSAs): Insurance Basics Quiz
Thank you for embarking on this journey through our comprehensive guide to Health Savings Accounts (HSAs) and participating in our detailed sample exam quiz on their fundamentals. Continue advancing your financial literacy and insurance knowledge!
