Health Savings Accounts

A Health Savings Account (HSA) is half of a two-part strategy for reducing the cost of health insurance. By combining an HSA with a High-Deductible Health Plan (HDHP), you can get good medical coverage at a low cost without the risk of being unprepared for high deductibles.

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What is a Health Savings Account?

When it comes to health care, the last thing you want to think about is the cost. But in reality, most people can't afford health care without some kind of financial assistance, such as health insurance.

With many health plans, you must first pay a specified portion of your health care expenses (the "deductible"), and the insurance company pays the rest. For example, if you have a $3000 medical bill and your insurance has a $500 deductible, you must pay the first $500 and the insurance company will pay the remaining $2500.

Unfortunately, health plans with lower deductibles have higher "premiums" (monthly cost for insurance), and are too expensive for many people. On the other hand, you may not be able to afford the deductible on a less-expensive plan. So, what can you do?

The solution is to get a low-cost High-Deductible Health Plan (HDHP), and then open a Health Savings Account (HSA) to cover the cost of the deductible. The HSA simply helps you save enough money to pay the deductible if you have to use your insurance. However, you can also use your HSA as a tax-free means of paying for any qualified medical expenses, including over-the-counter drugs.

What are the benefits of a Health Savings Account?

  • Allows you to purchase lower-cost insurance by covering the cost of a high deductible.
  • Your savings earns tax-free interest (see rates).
  • Contributions to your HSA are tax-free.
  • Distributions from your HSA are tax-free for qualified medical expenses, including over-the-counter drugs.
  • Unused funds and interest are carried over, without limit, from year to year.

How does an HSA work?

Anyone can contribute to your HSA, including:

  • Yourself (your contributions can then be deducted on your taxes, even if you don't itemize).
  • Your employer (contributions are made before taxes).
  • Another individual (you can deduct these contributions from your taxes).

You can use funds from your HSA at any time for any qualified medical expense, including your health plan's deductible costs.

Contributions to the account must stop once you are enrolled in Medicare. However, you can keep the money in your account, and use it to pay for medical expenses tax-free.

Who can have an HSA?

Any adult can contribute to an HSA if they:

  • Have coverage under an HSA-qualified "high deductible health plan" (HDHP)
  • Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long-term care insurance are permitted).
  • Are not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else's tax return.

Limitations to be aware of:

Note: This information is a partial summary of HSA regulations, and should not be taken as a complete or accurate representation of HSA law. For complete information, please read about HSAs here, or consult your tax advisor.

Total contributions are limited annually. The maximum allowed contribution is the lesser of:

  • The deductible of your qualifying health plan (HDHP)
    - or -
  • The maximum specified in law (for 2007):
    • $2,850 for self-only coverage
    • $5,650 for family coverage

Your High-Deductible Health Plan (HDHP) must have deductible of at least:

  • $1,100 for self-only coverage (for 2007)
  • $2,200 for family coverage (for 2007)

In addition, your health plan's annual out-of-pocket expenses (including deductibles, co-pays, and co-insurance) cannot exceed:

  • $5,500 for self-only coverage (for 2007)
  • $11,000 for family coverage (for 2007)

For more information:

U.S. Treasury - Health Savings Accounts (HSAs)
U.S. Office of Personnel Management - HDHPs with HSAs