Health Savings Account (HSA) Basics Waterville ME

The health savings account (HSA) was created, among other things, to combat the skyrocketing health care spending in the U.S.. Total spending averaged $7,600 per person—totaling $2.3 trillion nationwide—in 2007 and is expected to reach $4.2 trillion by 2016, according to the National Coalition on Health Care (NCHC). Health care spending in the U.S. represented 16 percent of GDP in 2007 and equals 4.3 times the amount spent on national defense, according to the NCHC. In response to these wallet-gouging numbers, many employers are offering Health Savings Accounts (HSAs) to their employees in an attempt to offset health care costs, allow people to save for future medical expenses and to make individuals more accountable for their own health care.

HSAs were created in 2003 when President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The Act defined HSA plans as U.S. trusts to be used exclusively for paying qualified health care expenses. An HSA must be used in conjunction with a High Deductible Health Plan (HDHP), which is defined as a health insurance plan with a deductible higher than $1,100 for self-only coverage or $2,200 for family coverage, as of 2007. Annual out-of-pocket expenses, including co-pays, cannot exceed $5,500 for self-only coverage or $11,000 for family coverage, as of 2007. These amounts are indexed annually for inflation. Those who are covered only by an HDHP, are not enrolled in Medicare and cannot be claimed as a dependent on someone else’s tax return are eligible for an HSA.

Until the high deductible is reached, the policy holder is responsible for nearly all medical expenses out of pocket. This is where the HSA comes in. Money can be contributed to the HSA expressly to be used for health care expenses so that individuals and families have a cushion in the event of a sudden medical need. Some expenses—such as yearly physicals and preventive treatment—may be subject to first-dollar coverage or to a co-pay instead.

Both employers and employees can contribute to HSAs. In 2007 the maximum yearly contribution was $2,800 for individuals and $5,650 for families. Individuals 55 and older can make an additional yearly contribution of $900 in 2008, and $1,000 in 2009 and beyond.

Contributions are pre-tax, just like a traditional IRA. However, in contrast to an IRA, this money will never be taxed as long as it is used only to pay for qualified medical expenses. This means that HSA holders can pay for their medical expenses completely tax-free. When used for non-medical purposes, HSAs function similarly to traditional IRAs. Money used for non-medical expenses is included in income and subject to a 10 percent excise tax unless the holder is age 65 or older.

Money placed in an HSA account earns interest and employees can choose to invest their contributions in fixed accounts, mutual funds, stocks or bonds for greater returns. The same investment options ...

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