Health Savings Accounts for Dummies
A health savings account (HSA) is a personal savings account that you can use to pay for qualified medical expenses. The money in an HSA account comes from contributions by the employer or employee. However, if an employee wants to make additional contributions, they can do so, provided that it does not exceed the maximum amount set by the law. For individual health coverage, an employee can contribute as much as $3000. The maximum amount of lump sum contributions for a family health coverage is $5,950.
Money in an HSA account is tax advantaged so there is a lot people who opt to open an HSA. Contributions are classified as pre-tax contributions which means that the sum of your HSA contributions will be deducted from your gross income, resulting in lower income taxes for you. Additionally, an HSA earns tax-free interest. Withdrawals in your HSA are also tax-free. This makes an HSA a sound investment opportunity for anyone.
Due to the tax-advantaged status of HSAs, many people opt to open one. However, opening an HSA account is not the same as opening a regular savings account in your bank where you just present the required documents and you will receive a passbook or an ATM card. One needs to be enrolled in an HSA-compatible health insurance plan in order to open an HSA. An HSA-compatible health plan is a high deductible health plan (HDHP). This means that people enrolled in an HSA-compatible health plan pay higher deductibles and lower monthly premiums. There are many companies that offer HSA-compatible health plans.
Once an individual is enrolled in an HSA-compatible health plan, he should visit his bank and request to open an HSA. The bank will then issue a debit card or a checkbook to the individual which he can use to pay for qualified medical expenses. He can choose not to use the money in his HSA since he is the owner of that money. At the end of every calendar year, whatever money is left in the HSA account will be rolled over to the next year. Because of this, some plan holders of HSA-compatible health plans do not withdraw funds from their HSAs unless they are going to pay thousands in medical expenses. Simply put, the account holder has control of the money in his HSA.
If a person decides to discontinue with his HSA-compatible health plan, he can no longer make contributions to this HSA but he can still use the money in his account to pay for qualified medical expenses. Should he decided at a later date to enroll in an HSA-compatible health plan, he can resume contributing to his HSA.
Keep in mind that not all HSA-compatible health plans are equal. Some offer FREE coverage for preventive health care services, while some do not. So be sure to choose one that offers such a benefit. It is also important to note that married couples can have separate HSAs provided that their HSA-compatible health plans do not have family coverage.
