A Guide to Health Savings Accounts

The health insurance industry has been gradually implementing the new laws set in the health reform bill. Changes to America’s current health care system will allow millions of people to get the medical coverage they so desperately need.  Eventually, health insurance will be a mandatory obligation for most American citizens and a health savings account is one of the tools that can be used to plan for the new expense.

Health savings accounts (HSAs) have only been around since 2003, when President Bush signed the Medicare Bill.  The U.S. Treasury explains these specialty accounts have been “designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.”

According to Reuters, because of the newly passed health reform laws, it is expected that the HSA banking niche will see industry growth of $50 billion to $100 billion. Since Bush first approved HSAs, the accounts have gained $8.6 billion in assets.

HSAs were designed for the 10 million U.S. workers and their families who have opted into high deductible plans. The reserves can be used to pay for additional expenses not covered by the insurance policy.  Almost anyone (except for Medicare recipients or dependents) can open and make HSA contributions as there are no income or age limitations.

Before opening an HSA account, it is important to know both the associated health savings account pros and cons:

Pros of Health Savings Accounts

• Interest earned is tax-free
• HSA contributions are tax free -  2010 HSA contribution limits are $3,050 for individuals, $6,150 for families
• Those over age 55 can add an additional $1,000 to HSA contribution limits
• Distributions taken for qualified medical expenses (i.e. over the counter drugs, prescription medicine) are non-taxable
• Some employers may make additional contributions to an employee’s HSA as a perk
• Health savings account interest rates tend to be higher than typical savings accounts
• HSAs can be inherited

Cons of Health Savings Accounts

• Since one’s health is unpredictable, this cushion may not accurately prepare for future expenses
• Maintenance fees for HSA accounts can be high
• Only high deductible insurance plan holders qualify
• The high deductible insurance plan must have high out-of-pocket maximum to qualify: the 2010 deductible limits are $1,200 for individuals or $2,400 for families
• Studies show those with an HSA go to the doctor less
  
• If the HSA savings are not applied to appropriate medical expenses, penalties and a 10% tax will be assessed

There are two ways to contribute to an HSA: An employee may have a portion of each paycheck deducted or an individual can establish an account and make deposits on their own. Either way, there are tax benefits associated with making HSA contributions. Employers cannot tax money allocated for HSA contributions and individuals can write-off the expense as an “above the line” deduction on tax forms.

Additionally, HSA accounts are indexed for cost of living increases so over time, you can save even more money and reap the rewards of your HSA account.

If you are considering establishing a savings account for your medical needs, review the U.S. Treasury the health savings account FAQ to help you decide if an HSA is right for you.