What is a Health Savings Account (HSA)?

"HSA" stands for "Health Savings Account," and Health Savings Accounts are great news for Americans!

The U.S. Congress recently passed legislation which makes paying for medical expenses much more affordable for consumers. As of January 1, 2004, the new law provides broad access to Health Savings Accounts, which allow consumers to pay for qualified medical expenses with pre-tax dollars (income-tax free!) and save for retirement on a tax-deferred basis.

An HSA is tax-favored savings account that is used in conjunction with a high-deductible HSA-eligible health insurance plan to make healthcare more affordable and to save for retirement.

HSAs are similar to IRAs, but even better:
Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65.

Any HSA funds not used each year remain in the account, and earn interest tax-free to supplement medical expenses at any time in the future.

Like an IRA, the account belongs to you, not your employer. But unlike an IRA, your employer CAN contribute to your HSA.

Why should I get an HSA?

You can save money in the short and long term by:

• Deducting 100% of your HSA contributions from your taxable income
• Having the money in your HSA accrue interest and/or gains on a tax-free basis
• Paying no penalties or taxes when you use your HSA to pay for qualified medical expenses
• Having a high-deductible HSA-eligible health insurance plan, which typically has a lower premium than a plan with a lower deductible

What are qualified medical expenses?

HSA's can be used to pay for many types of medical expenses, including those normally excluded from health insurance policies. Some of the qualified medical expenses include:

• Acupuncture
• Alcoholism (treatment)
• Ambulance (hire)
• Braces
• Capital expenditures - Home modifications for handicapped.
• Car equipped to accommodate wheelchair or handicapped.
• Childbirth preparation classes (mother)
• Chiropractors
• Crutches
• Dental fees
• Dentures
• Doctor's fees
• Domestic aid - rendered by nurse
• Drug addiction recovery
• Drugs (prescription)
• Eyeglasses and examination fee
• Hearing aid and batteries, modified telephone.
• Hospital care
• Infertility treatments
• Insulin Laboratory fees
• Lead paint removal
• Lifetime medical care (Prepaid; retirement home)
• Long-Term Care premiums
• Mattress (prescribed for alleviation of arthritis)
• Nursing home (medical reasons Obstetrical expenses Operations (legal)
• Optometrists
• Orthodontia
• Orthopedic shoes
• Oxygen/oxygen equipment
• Prosthesis
• Psychiatric care
• Psychologists
• Psychotherapists
• Remedial reading
• Sexual dysfunction treatment
• Surgical fees
• Swimming pool (treatment of polio or arthritis)
• Television (closed-caption decoder)
• Therapy treatments (prescribed by a physician)
• Transportation (essentially and primarily for medical care)
• Vitamins (prescription)
• Wheelchair
• X-rays

Generally health insurance premiums do not qualify as medical expenses, except for:

• Long-Term Care Insurance premiums
• Health insurance coverage while receiving unemployment insurance
• COBRA health insurance continuation coverage

What insurance plans are HSA-eligible?

In order to have a Health Savings Account, you must get an HSA-eligible health insurance plan. This type of insurance plan is often referred to as a High Deductible Health Plan, and typically has lower premiums than plans with lower deductibles.

A health insurance plan must meet the following criteria to be considered HSA-eligible:

• In 2008 the health insurance plan must have an annual deductible of at least $1,100 for individuals and at least $2,200 for families. In 2009 the health insurance plan must have an annual deductible of at least $1,150 for individuals and at least $2,300 for families.
• In 2008 the sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than premiums) does not exceed $5,600 for individuals and $11,200 for families. In 2009 the sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than premiums) does not exceed $5,800 for individuals and $11,600 for families.

NOTE: If you have other health insurance coverage (such as coverage under a spouse's employer-sponsored plan) in addition to your HSA-eligible health insurance plan, then the other plan must 1) also be HSA-eligible in order to contribute to an HSA or 2) the other plan cannot cover any benefits provided under your HSA-eligible plan.

How much can I contribute to my Health Savings Account (HSA)?

Maximum yearly contributions (and associated tax deduction) are determined as follows:

• For individuals, it is the lesser of:
      a) $2,900 in 2008 and $3,000 in 2009
      b) Your health plan's annual deductible*
• For families, it is the lesser of:
      a) $5,800 in 2008 and $5,950 in 2009
      b) Your health plan's annual deductible*

You do not have to contribute the maximum each year, although some Health Savings Accounts require a small minimum monthly contribution.

Note: If you are between the ages of 55 and 65, you can make an additional annual "catch up" contribution (2007 - $800, 2008 - $900, 2009 and after $1,000.)

*If you enroll in an HSA-eligible health plan in the middle of the calendar year, your maximum contribution for the first year will be prorated based on the number of months you have the HSA-eligible health plan. For example, if your individual health plan's annual deductible is $2400, and you enroll in the HSA-eligible plan on June 1st, then your maximum contribution for the first year can be up to $1400 (i.e. 7/12 of $2400). If you are enrolled for all twelve calendar months, then you can contribute the amount of the deductible up to the annual maximum allowed.

Is my money safe?

Funds in a Health Savings Account are held in a trust and are administered by a bank, insurance company, or other approved Trustee.

Funds in your HSA are invested at your discretion. Typically an Health Savings Account will allow you to choose from the following options:

• Interest-bearing account
• CDs
• Money market funds
• Mutual Funds

How do I use the funds in my HSA?

Using funds in your Health Savings Account is easy:

• Typically an HSA will provide you with a checkbook or debit card. When you pay for a qualified medical expenses, use the debit card or check to make the payment.
• You do not need to get approval from the HSA administrator when you use funds in your account.
• You do not need to submit receipts to the HSA administrator, although you should save them just as you keep receipts for other items that are deducted from your taxes.

NOTE: You must establish the HSA before you incur medical expenses otherwise the expenses will not qualify.

How do the HSA tax savings work?

An HSA makes it easy to save on your taxes: At the end of each year, you will be sent a statement showing the amount you contributed to your HSA that year. You can deduct this amount provided it is less than or equal to the maximum allowable contribution.

Much like an IRA, HSA deductions are "above-the-line" and thus can be taken even if you do not itemize.

If you are self-employed, in addition to deducting your HSA contributions, you may be able to deduct 100% of your health insurance premiums, provided that:

• You are not eligible to participate in a subsidized health plan offered by an employer or your spouse's employer.
• The deduction does NOT exceed the amount of net income from your business.

How can I get an HSA?

Health Savings Accounts (HSAs) are available to any person in the U.S. under the age of 65 who has an HSA-eligible health insurance plan. To determine which plans are eligible, give our office a call at 973-256-6000