A Health Savings Account (HSA) allows you to put money aside that can be used to pay for qualified medical expenses. The money is pulled from your wages before taxes and, if it is used for qualified expenses, you will never have to pay income tax on it. The regulations under which these accounts operate were signed into law in 2010 as part of President Obama’s Affordable Care Act. These funds roll over, if unused, and can sometimes earn interest. An HSA can be set up through your bank or another financial institution
How Does a Health Savings Account Work?
The rules that regulate a Health Savings Account can be found under IRS tax code 213(d). Some of the many things covered by this code include:
Deposits
Once the account has been set up, deposits can be made by anyone: the employee accountholder, their employer, or any third party. Employer contributions must comply with non-discrimination rules, except when contributions come from a Section 125 plan. In this case, employers can treat part-time and full-time employees differently, as well as individual and family participants and those who aren’t enrolled in an eligible health insurance plan.
Investments
Like an IRA, these funds are eligible for investment and the earnings, like the contributions, may be sheltered from taxation following qualified withdrawal. As with an IRA, these investments may also be directed by the employee. IRS tax code 408 clarifies the types of investments that can and can’t be made with these funds.
Withdrawals
Employees can withdraw funds without prior approval. However, it is necessary to keep records on how those funds were spent. You will need to provide proof to the IRS that withdrawn funds were spent on qualified expenses. Withdrawals can be made by check, debit card, or a reimbursement process.
HSA Contribution Limit Regulations
Every year the IRS publishes new individual and family contribution limits for your health savings account. Included are the corresponding minimum qualified insurance deductible and other out-of-pocket expense. These limits were initially established by the IRS based solely on the amount of the deductible. However, these limits are now regulated by congressional statute. There are catch-up provisions in place that allow for limit increases in participants over age 55.
What Type of Health Insurance Do You Need to Have?
To be eligible for this type of account, regulations require that you be participating in a specific type of health insurance plan. It’s called a High Deductible Health Plan (HDHP) and your savings account is paired with it. This type of insurance plan has become more popular since these savings accounts were established due, in part, to the lower premiums. There are other requirements that must also be met. An HDHP has both minimum and maximum limits on qualified deductible rates.
There is also a maximum limit in place on other out-of-pocket expenses, such as co-payments. These limits are different for individual and family plans. These are classified as catastrophic insurance coverage because they don’t usually cover wellness expenses. Instead, these are applied to the annual deductible, which is how the premiums are kept lower than with traditional insurance plans.
What Types of HSA Plans Are Available?
There are three basic options of consumer-driven HSA plans available for use to supplement medical insurance coverage. Besides Health Savings Accounts, there are also Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements(HRA). Like the HSA, the FSA and HRA are available to anyone whose employer offers them, but there are a few key differences. The other two plans do not allow funds to be used for expenses beyond non-covered medical care. However, you’re not required to pair them with a high deductible health plan so you can have any type of medical insurance or none at all. Unfortunately, the funds do not roll over and can’t be taken with you when you change jobs.
The Bottom Line
Although Health Savings Accounts offer a few plan choices, the HSA is the clear winner. It offers both low premiums and catastrophic coverage, in case the worst happens. Because it’s funded with pre-tax dollars, it can save you money in the long run. Any unused funds will roll over from one year to the next and you can take the money with you if you change employers. It’s clear that a Health Savings Account is something you should consider to ensure that you and your family are protected.