health savings account

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States. HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act which was signed into law by President Bush on December 8, 2003. These accounts are a component of Consumer driven health care.

A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.

What Is a “High Deductible Health Plan” (HDHP)? You must have an HDHP if you want to open an HSA. Sometimes referred to as a catastrophic health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn't pay for the first several thousand dollars of health care expenses (i.e., your deductible) but will generally cover you after that . Of course, your HSA is available to help you pay for the expenses your plan does not cover.

What type of plans will qualify me for a Health Savings Account? For 2006, in order to qualify to open an HSA, your HDHP minimum deductible must be at least $1,050 (self-only coverage) or $2,100 (family coverage). The annual out-of-pocket (including deductibles and co-pays) for 2005 cannot exceed $5,100 (self-only coverage) or $10,200 (family coverage). For 2006, these amounts increase to $5,250 and $10,500, respectively. HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and co pays & coinsurance) for non-network services.

How can I get a Health Savings Account? Consumers can sign up for HSAs with banks, credit unions, insurance companies and other approved companies. Your employer may also set up a plan for employees as well.

How much does an HSA cost? An HSA is not something you purchase; its a savings account into which you can deposit money on a tax-preferred basis. The only product you purchase with an HSA is a High Deductible Health Plan, an inexpensive plan that will cover you should your medical expenses exceed the funds you have in your HSA. But banks do charge fees for HSAs. A report by Vimo found that high fee structures for HSAs were correlated to high service levels, and not related to higher returns. [1]

Deposits

Deposits to an HSA may be made by any policyholder of a Qualified High Deductible Health Plan (HDHP), or by an employer on behalf of a policyholder. If an employer makes deposits to an HDHP on behalf of its employees, non-discrimination rules apply — that is, all employees must be treated equally. The only exceptions to the non-discrimination rules are that employers may treat full-time and part-time employees differently, and employers may treat individual and family participants differently. (The treatment of employees who are not enrolled in a HDHP is not considered for non-discrimination purposes.)

The deposits may be made on a pre-tax basis through an employer if the employer's fringe benefits plan permits such deposits under its setup. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease taxable income on the following year's Form 1040. Regardless of the method or tax savings associated with the deposit, the deposits may only be made in association with a HDHP. Deposits cannot be made on behalf of persons who are not on an HDHP.

The annual maximum deposit to an HSA is the lesser of the HDHP deductible or specified IRS limits. In 2006, the IRS limits are $2,700 for individual plans and $5,450 for family plans.^[1] All contributions to an HSA, regardless of source, count toward the annual maximum.

If a person is a participant in an HDHP for less than an entire year, the maximum deposit is prorated based on the number of months the person is enrolled in the HDHP. A catch-up provision also applies for HDHP participants who are age 55 or over, allowing the IRS limit to be increased. In 2006, the maximum catch-up amount is $700 (catch-up amounts are also prorated for partial-year participants).^[1]

All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends participation in the HDHP, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use.

Investments

Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).

While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k), and funds from these types of investment vehicles cannot be rolled into an HSA. Unlike a 401(k), HSA funds belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.

Withdrawals

HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer in order to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses. These include deductibles and coinsurance as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; purchase and use of over-the-counter medication; and transportation expenses related to medical care.

There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks for account holder use, and some allow for a reimbursement process similar to other types of insurance. Most HSAs have more than one possible method for withdrawal. The exact method of withdrawal varies from HSA to HSA and can be considered a marketing design issue. Checks and debits do not have to be made payable directly to the provider. However, in the case of an audit, account holders will be expected to provide documentary evidence that the transaction was for a qualified expense in order to avoid serious tax penalties.

Generally, if funds are withdrawn for a reason other than a qualified medical expense, those funds become subject to income tax and a 10% penalty. Once a person reaches the age of 65 or becomes disabled, however, funds can be withdrawn from an HSA for any reason without penalty. For funds that are used for non-medical expenses, regular income tax needs to be paid.

When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.

Benefits

The maximum out-of-pocket expense liability is often less than that of a traditional health plan. This is because a qualified HDHP often covers 100% after the deductible, thus eliminating co-insurance.

The premium for a HDHP generally is less than the premium for traditional health care coverage. This is mostly due to the elimination of co-payments and the higher deductibles. Their elimination lowers premiums because insurance underwriters are betting that Americans will consume less medical care and supplies, be more vigilant against excess and fraud in the healthcare industry, and shop for bargains if they see a relationship between medical cost and their bank accounts. Introducing consumer-driven supply and demand and controlling inflation in healthcare and health insurance were among the government's goals in establishing these plans.

There are no seperate deductibles for prescriptions or office visits. All money spent on these expenses are typically credited to one's deductible. This is very important benefit for people that take 3-4 medications per month.

Drawbacks

Many consumer organizations, such as Consumers Union, and many medical organizations, such as the American Public Health Association, have rejected HSAs because they benefit only healthy, younger people and make the health care system more expensive for everyone else. The fundamental problem for individuals is that the plans don't pay anything until you've paid a large deductible. Some HSAs pay for basic preventive care, such as annual physicals and mammograms, but others do not. For example, a patient with a suspicious mammogram may have to pay $1,000 out of pocket for a biopsy to find out whether the breast really has cancer.

In her testimony before the U.S. Senate Finance Committee's Subcommittee on Health, Commonwealth Fund Assistant Vice President Sara R. Collins, Ph.D., said that all evidence to date shows that health savings accounts and high-deductible health plans worsen, rather than improve, the health system's problems. Committee on Finance, September 26, 2006

Early experience with HSA-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems, Collins said. A survey conducted with the Employee Benefits Research Institute found that people enrolled in HSA-eligible high-deductible health plans were much less satisfied with many aspects of their health care than adults in more comprehensive plans:

• People in these plans allocate substantial amounts of income to their health care, especially those who have poorer health or lower incomes.

• Adults in high-deductible health plans are far more likely to delay or avoid getting needed care, or to skip medications, because of the cost. Problems are particularly pronounced among those with poorer health or lower incomes.

• Few Americans in any health plan have the information they need to make decisions. Just 12 to 16 percent of insured adults have information from their health plan about the quality or cost of care provided by their doctors and hospitals.

Nbauman 04:20, 7 October 2006 (UTC)

HSAs vs. other types of medical savings plans

Health Savings Account effectively replace medical savings account (MSA) plans that were authorized by the federal government. HSAs can be used with health plans with decreased minimum deductibles, and a higher fraction of the population is eligible to enroll in them. The changes were made in legislation signed by George W. Bush on December 8, 2003. The law went into effect on January 1 2004.

HSAs differ in several ways from MSAs. Perhaps the most significant difference is that employers of all sizes can offer an HSA account and insurance plan to employees. MSAs were limited to employers who employed 50 or fewer people. That change is important, because employers are the sponsor of health insurance for most people in the US.

Notes

1. ^ ^a b 2006 IRS Guidelines. healthinsurance.com. Retrieved on 2006-08-11.

See also

• Flexible spending account

External links

• U.S. Treasury site on HSAs
• HSA for America - Plan provider offers information about Health Savings Accounts.
• 2006 HSA Contribution Limits
• List of HSA Providers by State
• Non-profit informational site on Health Savings Accounts
• Health Decisions HSA Page - a comprehensive resource that includes HSA news, events and consumer resources.
• HSA Insider - a site with a useful FAQ on HSA's.
• - Vimo reportranks most affordable HSA accounts.
• Directory of HSA Administrators