The ABCs of HSAs
by Karen Auby
Use or Lose Your Flexible Spending Account
There has been a lot of talk about Health Savings Accounts (HSA) lately. Many consumers may be confused by these high-deductible health insurance plans coupled with IRA-style savings accounts. In reality, they're pretty simple and getting more and more popular.
What is an HSA?
HSAs were developed to maximize your savings on health insurance while providing you with a valuable tax break. An HSA program has two parts: an eligible, high-deductible health insurance plan and a tax-advantaged savings account. For an individual, an HSA-eligible health insurance plan must have an annual deductible of at least $1,100 for individuals ($2,200 for families), which means you'll have to pay the first $1,100 of medical expenses before your health coverage kicks in.
The second part of an HSA program is an IRA-style savings account that allows you to reduce your taxable income by building savings. You can deposit funds up to the total of your health plan's annual deductible into the HSA-account each year. So, within certain regulatory limits, the higher your health plan's deductible, the more you can tuck away tax-free.
What health benefits can I expect?
Online health insurance agent, eHealthInsurance, recently released a report detailing the plan benefits for HSA-eligible health plans. The benefits provided are surprisingly rich. Here are some interesting facts from the eHealthInsurance report, Health Savings Accounts: The First Year in Review:
- Over 80% of the plans had 100% coverage, after the deductible, for office visits, x-rays/lab, hospitalization and surgery
- Almost all, 99.4%, of the plans had some type of prescription drug benefit
How does the tax savings work?
If you make $40,000 a year and you put $2,000 in your HSA, you'll only pay taxes on $38,000. What happens to that $2,000? Like an IRA, the HSA is meant to encourage you to save for retirement. Funds placed into your HSA can be invested to earn tax-free income and the balance will roll over from year to year until retirement age. But, unlike an IRA, you can use your HSA funds to cover medical expenses without penalty. The funds in the account may be used to cover any qualifying medical expense, which in many cases includes over-the-counter drugs and eyeglasses, as well as co-payments and any medical costs incurred before your annual deductible is met. eHealthInsurance has even provided an HSA Calculator designed to show you the value of an HSA program.
Who buys HSA-eligible plans?
The eHealthInsurance report also included interesting information on the types of people who have purchased HSA eligible health insurance plans. Contrary to many skeptics who assumed that HSA purchasers would be only the young and wealthy, findings show that is not the case. Here are some interesting findings on HSA-eligible health plan purchasers:
- Their average age is 40
- HSA plans are equally attractive to families and individuals
- 40% of them earn $50,000 or less per year
- Nearly one third of them were previously uninsured for at least six months
- Almost 90% of them pay $200 or less per person per month
If you're looking for a way to maximize you tax savings while reaping the benefits of a quality health plan from a reputable insurance company, look no further than HSA-eligible health plans. As always, you should consult a tax advisor to make sure you're getting the most savings possible.
The Dollar Stretcher has teamed up with eHealthInsurance to provide an online health insurance solution for you, your family or your small business that makes it easier to find the health insurance plan that is right for you. Visit eHealthInsurance.com to get a Quote and Compare Rates.
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