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August 15, 2011
How Health Savings Accounts Really Work
A Health Savings Account, commonly known as an HSA, adds tax advantages to certain health insurance plans that have deductibles. Like other high-deductible plans, those that allow you to open an HSA, typically have premiums in the least expensive range.
Like other deductible plans, HSA Plans cover 100 percent of your medical expenses once the total out-of-pocket limits are met (including the deductible). For 2011, annual out-of-pocket expenses are limited to $5,950 for individual coverage and to $11,900 for family coverage. The minimum deductible for an HSA-qualified plan is $1,200 for individual coverage and $2,400 for family coverage in 2011.
As soon as your HSA-qualified health plan is in effect, you can open an HSA. It's important to do that asap even if you only make a minimal deposit. Once you start an HSA, you can retroactively deposit funds to pay for previous medical expenses, but your HSA must have been open when you incurred the expense.
Some of the other benefits Health Savings Accounts offer include:
- Pre-tax contributions can reduce your taxable income
- After-tax contributions are tax deductible
- HSA contributions and earnings grow tax deferred
In 2011, you may contribute up to $3,050 for an individual HSA or up to $6,150 for a family HSA. If you are 55 or older, you're allowed to make an additional $1,000 contribution.
Whatever you contribute may be used for qualified medical expenses without paying taxes on those funds. Any funds not needed for health care remain in your health savings account unlike flexible spending accounts, where unused funds are lost at the end of the year.
HSA funds remain your property when you leave a job even if the employer contributed to your HSA on your behalf. You also have control over how you invest the funds. You can choose from savings accounts, money market accounts, stocks, bonds, and mutual funds.
Before you turn 65, you'll get a 20-percent penalty if you use your HSA funds for anything other than qualified medical expenses. You'll also have to pay income taxes on those withdrawals. Once you're 65, you'll still have to pay taxes on HSA withdrawals, but there's no penalty. We've loaded our site with informational resources to help you decide whether an HSA is right for you.
Posted by Wiley Long at August 15, 2011 07:59 AM