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HSAs (Health Savings Accounts)
What are they?
HSAs offer many benefits, but the most noticeable are the tax savings, lower heath insurance premiums and a single deductible for an entire family.
In the most generic terms, an HSA is an IRA with a kick – namely, the ability to draw pre-tax dollars from your HSA to pay for all qualifying medical expenses. Like an IRA, any money you contribute to your HSA is "pre-tax" funds. Those funds stay in your own personal account until withdrawn for either qualifying medical expenses or as ordinary income once you've reached the qualifying age of 65. However, funds are not required to be withdrawn at any certain age, and they can be used to fund medical expenses during retirement with the same tax advantages.
HSA's consist of two components:
- A high deductible health plan that must be labeled as an HSA qualified plan.
- A separate savings account that is typically independent of the Health plan, the account must be labeled as an HSA account.
To realize the tax benefits that HSA's offer you must have both components in place. For example, you are not eligible for HSA tax savings without have a medical plan in place that is labeled as an HSA qualified health plan.
Created by the Medicare bill in December 2003; an HSA allows individuals to save for current and future qualified medical expenses on a tax-free basis. However there are a few rules.
Click here to learn more about HSAs
What are qualifying medical expenses?
Deductibles, prescriptions, over-the-counter medicine (with a prescription), dental care, braces, crutches, chiropractic, psychiatric care, vitamins (by prescription), oxygen and related equipment, optical treatment including eyeglasses and contacts, Lasik eye surgery and even some long term care and COBRA premiums. The complete list of qualifying expenses can be seen in IRS Publication 502.
Benefits
Savings
HDHP (High Deductible Health Plans) typically cost less than a low deductible plan while limiting your over-all out of pocket expenses. This allows you to have your HDHP provide catastrophic medical coverage, while allowing you to use the premium savings to fund your HSA account.
Reduced Taxes
Any contributions made to an HSA, whether used in the year deposited or not, reduce your taxable income by the amount of the contribution for both federal & state taxes.
Build Tax-Favored Savings
HSA contributions grow in a pre-tax environment for as long as you keep the money in the account. With your HSA, the money stays in your account, growing year after year, either by accruing interest or by being invested in mutual funds.
What Are The Rules?
Most anyone can qualify for a HSA. However you must have a qualifying HDHP (High Deductible Health Plan). HDHPs are defined as having a minimum annual deductible amount for both individuals and families. Annual out-of-pocket expenses are also set. Because they are indexed annually, click here to find the current Minimum Deductibles and Annual Out of Pocket Expenses.
Qualifying HDHP plans can allow first dollar coverage for preventative care. However, first dollar coverage for general doctor office co-pays or prescription drug co-pays are not allowed. These benefits are often included in the HDHP, but are subject to the deductible before the co-pays apply. Prior to the HDHP deductible being met, you can pay for these expenses with funds from your HSA. Click here to see a list of qualified expenses and to see the IRS regulations.
To be eligible, you cannot be covered by another health plan although there are certain exceptions, be enrolled in Medicare, or be claimed as a dependent on someone else's tax return. There are no income limits or minimum income requirements. Click here to see eligibility requirements.
* This page is for informational purposes only. INSURERS OF IDAHO does not guarantee the accuracy of this information please consult a tax advisor for complete details.