Health Savings Accounts (HSAs) are American savings accounts for healthcare expenses. They offer tax breaks, but have limitations and qualifications. The account can be opened at approved banks, credit unions, and insurance companies.
A health savings account (HSA) is a savings account that helps people save for health care expenses for themselves, their spouses, and their dependent children. Although there have been similar concepts before, the Health Savings Account is a specifically American concept. In Canada, for example, the model is a tax-free savings account that can be used for many purposes, rather than having a separate and distinct healthcare account. A health savings account can be opened at a bank, credit union, insurance company and other companies that have been approved.
The HSA officially went into effect in December 2003 when President Bush signed the “Medicare Prescription Drug, Improvement, and Modernization Act of 2003.” The account is owned by the person who creates it and can be used for current and future health care expenses and helps create protection against unexpected or high medical bills. There are certain favorable tax breaks associated with an HSA, but use of the money for purposes other than qualified medical expenses makes the amount taxable as income and adds a penalty tax.
There are several qualifications for having a health savings account. One must be an adult and covered by an HSA-qualified High Deductible Health Plan (HDHP). No first-dollar alternative medical coverage should be held, although accident, injury, dental, vision, disability, and long-term care insurance are excepted, and one may have any or all of these simultaneously with an HSA. Also, you cannot yet enroll in Medicare and cannot be claimed as a dependent on someone else’s tax return.
There are also several limitations on the Health Savings Account. Although contributions may be made by an individual, the individual’s employer, or both, the total contribution is capped annually and must stop once the individual is enrolled in Medicare. However, the money in the account can be used to pay for not only most medical care and services, dental care, and vision, but also over-the-counter medicines, including simple things like aspirin.
Creating a health savings account will save some people money on their health care by significantly lowering their health insurance premium. The money can be invested and earn income. Tax savings occur in three ways: tax deductions on contributions made to the account; tax-free investment earnings; and tax-free withdrawals for qualified expenses.
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