What Is a Health Savings Account?

A health savings account (HSA) is a tax exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses for beneficiaries covered under a qualifed high deductible health plan (HDHP). With an HSA, you can pay for current and future eligible medical, dental and vision expenses.

You own and control the funds in your HSA. Money you contribute to your HSA is federally tax deductible, whether or not you itemize deductions (see HSA FAQ page for discussion of limits on contributions). Your funds can be conveniently accessed by a debit card to pay medical expenses. An HSA is similar to an IRA; however, HSAs are specifically dedicated to medical expenses.

In order to open an HSA, you must be covered by a qualified high deductible health plan (HDHP), not also be covered by any other health plan that is not a high deductible health plan (with certain exceptions for certain types of permitted coverage, as discussed more fully on the FAQs page), not be enrolled in Medicare, and not be claimed as a dependent on another person’s tax return. An HDHP costs less than traditional health care plans due to the higher deductible, so the money saved on monthly premiums can be added to your HSA. HDHPs are available to individuals under age 65, families and employer groups of all sizes.

In 2008, an HDHP consists of an annual deductible of at least $1,100 for an individual and $2,200 for a family. In addition, the out-of-pocket maximum limit, including deductibles, is $5,600 for an individual and $11,200 for a family. In the case of a family plan, the HDHP may not start paying for any individual until the $2,200 family deductible is satisfied. Please be aware that not all plans with high deductibles qualify you to open an HSA. The policy must meet the specific HSA design specified by the U.S. Congress.

Qualified high deductible health plans are available from Marsh. Click here for more information.

Among the Valuable Benefits of an HSA:

• Lower health insurance premiums than with regular health plans
• Contributions may be made by an individual, an employer or both
• You own your HSA and choose how to invest the funds
• You are eligible to deduct contributions you make on your federal income tax return even if you do not itemize deductions (California does not permit the deduction).
• Interest and other earnings on an HSA maintained in accordance with federal law are not taxable on your federal return.
• Withdrawals for qualified medical expenses are federally tax-free
• Catastrophic protection is provided through the high deductible health plan
• HSA plans continue to grow if the money is saved and not used for health-related expenses since funds may be rolled over to subsequent years
• Freedom of choice to see any physician you choose

If you use the funds for other than health care related expenses, you must pay income tax plus a 10% penalty. Upon attaining age 65, you may also use the funds for non-medically related expenses.You will only have to pay income tax on the withdrawals at that point.