Health Savings Account HSA Information

How Health Savings Accounts Work

Health Savings Accounts (HSAs) are simple and easy to understand.

A Health Savings Account is a tax-favored savings account combined with a qualifying high-deductible health insurance plan.  By allowing you to deposit tax-deductible funds into an account that you can use to cover medical costs, HSAs enable you to take control of your own health care decisions.

First you must have a high-deductible health insurance plan that qualifies to be partnered with an HSA.  These plans are available through various insurance companies, depending in what part of the country you live.  The plans are all similar in the fact that they have deductibles between $1,200 and $5,950 for singles, and between $2,400 and $11,900 for families.

Once your insurance policy has become effective, you may fund your HSA account.

Tax Deductible Contributions

HSAs allow you to legally avoid federal income tax by saving up to $3,050 for singles or $6,150 for families, into your HSA account*.  There is no minimum deposit (it can be $0 if you want), but whatever you deposit into your account by April 15 is an "above the line" tax deduction for the previous year's income taxes.  This means that you get a federal income tax deduction for money you put in even if you take the standard deduction and don’t itemize deductions.  This tax deduction is available to everyone, with no limitations on the amount or source of income.

If you cancel your HSA-qualified health insurance before you've had the coverage for a full 12 months, your maximum contribution amount is pro-rated based on the number of months you had your coverage in force.

A one-time roll-over from your IRA (Individual Retirement Account), HRA (Health Reimbursement Arrangement) or FSA (Flexible Spending Account) is allowed.  

If your employer makes an HSA contribution for you, it is “excluded” from income, and not subject to any income tax or FICA.  Either way, this will immediately reduce your federal income tax due for the year.  Most states also allow you to take a state income tax deduction for HSA contributions.  To see if your state offers tax deductions, please see our HSA State Income Tax page.

IMPORTANT:  You must have your HSA-qualified health insurance in place by December 1st in order to qualify for a 2010 tax break.  You only have , so you should apply as soon as possible.

* Individuals age 55 and over may deposit into their account (and take a tax deduction on) an additional catch-up contribution of $1,000 in 2010. 

Tax-subsidized Medical Expenses

Even though you have received a tax deduction by putting your money into this account, the money is still yours to spend tax free, as long as you spend it on qualified medical expenses.  Since you have a high-deductible plan, this would of course include any expenses you incur from going to the doctor, purchasing prescription drugs, or paying other expenses toward your deductible.  Once your deductible is met, the health insurance covers your medical expenses as defined in the policy.

In addition to being able to withdraw your money tax free to cover these types of expenses (which might otherwise be covered by a traditional low-deductible high-premium policy), you can use your HSA account to cover other costs that would not normally be covered by a health insurance policy.

These include:

• Dental expenses.  Individuals can typically only purchase dental discount plans, or fairly expensive dental policies with a limited choice of dentists.  Coverage for braces is normally very limited.  However, any of these medically necessary procedures can be paid for from your HSA account.
  
  
• Mental therapy.  This includes the charges of psychiatrists, psychologists, psychoanalysts, and psychotherapists.
  
  
• Physical therapy.  This could include hydrotherapy, chiropractor services, or medical massage therapy.
  
  
• Alternative treatments.  This could include acupuncture, Ayurvedic Medicine, aromatherapy, homeopathy, Traditional Chinese Medicine (TCM), nutritional consulting, or even healing services provided by a Christian Science Practitioner or other type healer.
  
  
• Transportation and lodging expenses, when related to health care
  
  
• Charges incurred as part of a preventive health program.  This could include vaccines, blood tests, metabolism tests, and other lab tests, and even fees paid to a health institute or vitamins if prescribed by a doctor.
  
  
• Nonprescription medications, such as aspirin or cough syrup
  
  
• Special fees incurred by handicapped individuals, including wheelchairs, telephone or TV equipment to assist the hard-of-hearing, the cost and care of guide dogs, or special school costs for the handicapped
  
  
• Maternity expenses that are not covered by your health insurance policy
  
  
• Insurance premiums to pay for qualified long-term care

Also note that the HSA account can be used to pay these expenses for any spouse or dependent member of the family, even if they are not covered under the insurance policy.

More complete information can be seen on our Qualified Expenses page.

Premium and Tax Savings

Health Savings Accounts can help you save money on both your insurance premiums, and your income taxes.  Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical plan that has a $500 deductible.  And there is no other investment that offers a tax deduction today along with a tax-deductible withdrawal tomorrow.  The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year.

Below is an example comparing how much a typical Non-HSA plan might cost, compared to a typical HSA plan.  This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $1,500, and $550 in expenses for dental care, contacts and eyeglasses.  This shows what would happen if the HSA holder is in a 28% federal tax bracket and 5% state tax bracket, and deposits $6,150, the maximum contribution allowed, into his HSA.

Long-term savings

A particularly appealing aspect of HSAs is that they encourage individuals to stay healthy.  Any money from your HSA account that is not used to pay medical expenses is yours to keep.  The money grows in the account free from federal taxes and remains free from federal tax when you take it out if it is used for qualified medical expenses.  If you withdraw funds for non-medical expenses, you pay taxes on the amount withdrawn.  There is a 10% penalty if the funds are withdrawn before age 65 for a non-medical expense, but after age 65 they can be withdrawn penalty-free for any reason (you do pay income tax on the money withdrawn).

Because all your deposits that are not used to pay medical expenses grow tax-deferred, the investment opportunity is tremendous.  Potential return depends upon the interest rate at which your investment grows, and on how much of your deposit is used to pay medical bills.  Investments can be placed in savings accounts paying 1 - 4%, or in stocks, bonds, or mutual funds with higher potential returns.

For most Americans, out-of-pocket medical expenses are a relatively small expense each year.  This chart shows one group’s estimate for annual medical expenses back in 2004.  Though the numbers have changed some since then, the fact remains that most healthy people are unlikely to incur large medical expenses in any given year.

Money Spent on Medical Care Annually Percentage of U.S. Population No Medical Expenses - $0 33% $1 - $500 40% $501 - $1,000 9% $1,001 - $2,000 7% $2,001 - $5,000 6% $5,001 - $10,000 3% $10,001 - $25,000 3% $25,001 - $50,000 .5% $50,001 - $100,000 .2% $100,001 - And Up .05%

If you regularly fund your HSA, and are fortunate enough to be healthy and not use a lot of medical care, a substantial amount of wealth can build up in your account.

Long Term Savings Chart 

To calculate the future value of your own HSA based on your deposits, investment return, and number of years until retirement, please use our HSA Future Value Calculator.

How to Choose an HSA

First, review all the information on this page and check out our Q & A section to familiarize yourself with HSAs.  Then visit our “How to” Guide to learn how to choose the right plan, how to apply for coverage, and how to set up your HSA

If you are looking for coverage for a small business, please see our Small Group HSA Plans page for our recommendations.

"The HSA for America web site is the best I’ve seen – a wealth of information" The most frustrating thing about shopping for health insurance has been getting good unbiased advice from a knowledgeable firm.  I have been literally hounded by salesmen marketing "insurance" that was really just a discount medical plan.  In addition, working directly with the insurers themselves was sometimes frustrating - as their representatives were typically not very responsive.  With HSA for America, I received prompt and courteous service from knowledgeable representatives.  The HSA for America web site is the best I've seen - a wealth of information for somebody shopping for an HSA eligible insurance policy as well as HSA account administrators. Thanks for your advice and service - I hope we can continue a mutually beneficial relationship for years to come.  When the opportunity presents itself, I will definitely recommend HSA for America. John Janney Anthem, AZ Read More...

HSA for America Additional Benefits

Health Savings Accounts are meant to get the consumer more involved in their healthcare decisions.  By encouraging consumers to shop their healthcare, HSAs encourage competition among providers and lead to lower costs.  To assist our clients and visitors in reducing their medical expenses and income taxes and maximizing their HSAs, we have put together an exclusive package of money-saving benefits.  Learn how to reduce your costs for prescription drugs, lab fees, hospital bills, and more:  HSA for America Additional Benefits.

Overall impact of HSAs

We truly believe that Health Savings Accounts are one of the best things to come out of Washington in a long time. They encourage several things that are positive for America's future:

• HSAs put market competition back in the healthcare arena.  Ever since most first-dollar expenses have been paid for by a third party (insurance companies), medical expenses have soared.  We believe that individual consumers are better able to decide how and where to spend their health-care dollars than are insurance companies.  People who buy medical services using their personal HSA funds will shop around for the best value for their dollars, and health care providers will feel pressure to charge competitive rates to attract patients.  In other words, doctors will shift their focus from serving the insurance companies back to serving their patients.
  
  
• HSAs encourage people to stay healthy.  By making many preventive expenses eligible for coverage through HSA accounts, and by letting people keep any money they don't use, HSAs provide a powerful incentive for people to take a more proactive approach to their own healthcare.
  
  
• HSAs let consumers choose how to spend their own health-care dollars.  Only by giving individuals the freedom to make their own choices can we as a society learn of the best solutions.  By allowing the use of HSA funds to pay for alternative, holistic, and preventive treatments, innovation and investment will be encouraged in areas where the current system has failed to find solutions.  And people will be able to use the type of medicine that works for them.  The end result should be a healthier populace with access to a wide choice of treatment options.