Health Savings Accounts are not actually products, per se: they are concepts.  An HSA is simply an insurance plan which meets the federal government guidelines that the plan must be a high deductible, non-co-pay plan, sold as an HSA-compatible policy. You cannot take an existing policy and turn it into an HSA-compatible plan if it was never sold or applied for that way. HMOs cannot be HSAs as they are co-plans. You cannot start a savings account at the bank and earmark it for medical expenses and call it a health savings plan.

Formerly known as an MSA (Medical Savings Account), the HSA (Health Savings Account) is a savings account created and used specifically for the paying of medical expenses in conjunction with a health insurance policy. Such expenses are not limited to what your medical policy covers, but also include optical, dental, chiropractic, day care and long term care expenses…. any expenses considered medically allowable by the IRS.

HSAs offer tax benefits to not just the self-employed but everyone, and is treated much like an IRA for purposes of tax-deferred savings, tax-exempt interest and early withdrawal penalties. Money remaining in your account at the end of the year automatically rolls over into the next year, enabling your HSA to grow. This is your money.

Several carriers offer HSAs: these are high deductible plans offered in conjunction with an insurance policy. You can choose a pure indemnity program (go to any doctor, anywhere) or the more prevalent PPO (using a network provides greater first-dollar savings on your medical expenses as well as lower premiums). These are not co-pay plans: you pay out-of-pocket and those expenses, usually reduced by your PPO, count toward the deductible and coinsurance, if applicable. Underwriting for an HSA-compatible insurance plan is the same as for any other helath insurance product.

Depending on the carrier, individuals generally have a choice of several deductibles, ranging from $1100 to $5,000 for individuals and from $2200 to $10,000 for families. With the latter, deductibles are considered family deductibles, in that everyone on the plan contributes to one common deductible rather than each family member having to meet their own deductible. This feature alone makes many families turn to HSA-compatible policies for their coverage, as it keeps their out-of-pocket expenses significantly lower in the event of major services. Depending on your carrier, your plan may offer 50/50, 80/20 or - most popularly - 100% coinsurance following your deductible. This is the second feature that individuals and families like - 100% coverage once - and if - a deductible is met.

How an HSA plan works: you cover your medical expenses (usually subject to PPO discounts if your plan is tied to a preferred provider network, as most are), up to your deductible amount, and may take this money out of your medical/health savings account, tax-exempt, to pay them. In order to recognize this tax benefit, you must  have money in a qualified health savings account. There is no requirement that you contribute any specific amount in any specific timeframe - you don't have to even set up this account if you don't want to, it simply offers tax benefits if you do. However, you cannot incur a medical claim and then contribute money to the account in order to cover it: money must be in the account prior to claims occurring in order to use tax-free dollars in order to pay for those claims. You must have an HSA-compatible, fully underwritten health plan in order to set up an HSA account. You cannot set up this type of tax-free acount without an appropriate insurance policy. You cannot "convert" a non-HSA-compatible plan into an HSA-compatible plan.

To an HSA, a single person can contribute up to $2800 per year and a couple/family can contribute up to $5600, regardless of deductible. (The IRA raises these amounts a little bit each year.) Again, these are guidelines, not requirements.

Deposits to an HSA are tax exempt, like contributions to any other IRA. If you are self-employed, you know there is a "cap" on how much you can contribute to a SEP-IRA every year. The HSA was a boon to the self-employed as it received the same treatment by the IRS as an IRA but does not count towards your IRS contribution "cap" - it is over and above that limit! The recent legislation regarding HSAs is even more of an improvement. You do not have to be self-employed to have this kind of insurance or account.

You may not pay the premium from your HSA account, and your premiums do not contribute to the HSA account.

With an HSA, any money withdrawn from the account for medical expenses is tax-exempt. Instead of having to gross $140 in order to net $100 to pay for a $100 doctor visit, as you would do with a conventional plan, your $100 gross pays for the $100 doctor visit. This is a savings of $40 in that you would have had to have earned that much more, before taxes, in order to pay  out $100, after taxes. Only HSAs allows for this tax savings.

The average consumer goes out-of-pocket a fair amount every year paying for expenses that a health plan may not cover, such as glasses, contacts, dental, durable medical equipment, nursing homes, birth control, chiropractor, RK, vaccinations.... and with after-tax dollars. With an HSA, those expenses would be paid for with your pre-tax dollars, regardless of what your health plan does or does not cover. (If the IRS allows it, it may be paid through the HSA account.)

Many HSA policy holders leave the money in the account, contribute the maximum allowed every year, and then don't use it at all, preferring to let it grow tax-deferred to age 65. Once you have reached age 65, the HSA functions like an IRA – you can withdraw the money at any time for any reason, paying only normal income tax. The interest on an HSA is not taxable unless the money is spent on non-medical expenses; then you will pay tax on the distribution.

If you have an HSA for seven or eight years then cease to have that carrier's policy, you can keep the money already contributed in the HSA account and continue to withdraw from it, tax-exempt, for medical expenses, but you can no longer contribute to it. You can also simply let it sit and continue to earn interest, like any other IRA would, to age 65. If you "break" or "cash out" the IRA, you will pay the same penalties and losses as you would for any other IRA. At age 65, money in a HSA can be used to pay for services not covered by Medicare, such as long term care, prescriptions, etc.

When considering an HSA, keep in mind all the tax-exempt and tax-deferred savings that cannot be recognized with any other type of medical insurance plan. You may have a higher deductible but you will save hundreds to thousands every year, and your out-of-pocket is still limited to your deductible (and coinsurance, if and where applicable) – usually paid for with pre-tax dollars.
 
 
 

 *Items not normally covered by your insurance plan but considered to be medical expenses by the IRS (such as those items listed above) do not count toward your health insurance deductible but still qualify for payment through the tax-exempt HSA-savings account dollars.