The concept of a Health Savings Accounts (HSA) was established by Congress in 2003 to allow individuals and families to save for and pay for medical expenses with tax preferred money.
The tax preferences are significant. In fact, HSAs are “triple tax” preferred, which means:
That’s a powerful incentive for everyone to have an HSA to help save for the inevitable medical expenses we all have, whether it’s routine care with your doctor, the cost of prescription drugs, or for a major accident or sickness.
An HSA is NOT a substitute for a major medical health plan. Instead, HSAs are meant to complement and work with your health plan so that you’re only using the HSA to fund your normal out-of-pocket costs (like your deductible and copays for example). Paying these health care costs with tax preferred money is an enormous advantage to individuals and can really help make your savings go further in helping to pay for health care.
Because HSAs have all these tax advantages, Congress put some significant limitations in place on how they work and who is eligible for an HSA.
Anyone is eligible to establish an HSA, but in order to actually put money into the account, you have to be insured by a Qualified High Deductible Health Plan (QHDHP). These plans have specific limitations that Congress intended as a complement to the HSA. A QHDHP can have no “first dollar” benefits. This means you can’t have Doctor’s Office Visit Copay benefits or a Prescription Drug Card Copay plan. Instead, a QHDHP has a relatively high deductible (although the deductible range has become more and more the norm over the years). Individuals must meet their plan deductible BEFORE they can start receiving health benefits. That’s where the HSA comes into play. The savings account is there to help pay for those first dollar medical costs the health plan doesn’t.
The QHDHP requirements change annually and it’s beyond the scope of this blog to list all of them. However, the internet is loaded with websites describing the details - Kiplinger is a good resource for HSA info.
Once you’re enrolled in a QHDHP, you can begin to contribute to your HSA. And just as important, if you’re covered under an employer plan, your employer also can contribute to your account.
In fact, HSAs became popular when employers took the premium saving from moving to a high deductible plan and started using it as savings contributions for their employees. Contributions are limited each year so it’s important to understand these contribution limits. Again, Kiplinger -which we linked to above - is a great resource for the exact contribution limits for your account.
Once you have money in your account, what can you spend it on? The list of qualified medical expenses is lengthy. The best part is it goes beyond things that your typical health plan covers and allows you to spend from your account on things like vision care and over-the-counter medicines. The Motley Fool has a very comprehensive list.
As your circumstances change –new jobs, new health plans, becoming Medicare eligible – all have an impact on HSA rules. If you change health plans to a non-QHDHP, you can keep your HSA, however you’re not eligible to continue new contributions to it.
With an HSA, you can always spend the money you have accumulated for qualified health expenses. And, once you reach Medicare age your HSA funds can be used to help pay for a Medicare Supplement policy (a powerful incentive to save money for the future).
Health Savings Accounts are both a powerful tool that can help you be prepared for health expenses in the future and tax favored savings device you can carry forward with you into retirement.
Founded in 1970, Allied is one of the nation's oldest and most experienced third-party administrators. Allied National is a 90 Degree Benefits Company, a subsidiary of Blue Cross Blue Shield of Alabama. As the small group benefit experts, Allied works with small business employers to provide unique and affordable group health benefits.
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Allied National is a 90 Degree Benefits Company, a subsidiary of Blue Cross Blue Shield of Alabama. Founded in 1970, Allied National is one of the nation's oldest and most experienced third-party administrators. We're the small group benefit experts working to provide unique and affordable group health benefits to small business employers.