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A QUICK - SIMPLE
OVERVIEW OF HOW AN HSA WORKS
With an HSA, you divide the money you would normally spend for
health insurance into two parts:
Part One: You buy a much lower cost medical insurance plan to
cover the BIG BILLS-the deductibles range from $1000 to $2600
for a single and $2000 to $5150 for families (2 or more).
Part Two: The rest of the money you would normally spend on
health insurance you can put into a TAX DEDUCTIBLE Health
Savings Account (up to the amount of the deductible). This money belongs to you; what you don’t spend is yours to keep. Some HSA
accounts pay 5% interest on any balance in the account and the
interest accumulates TAX-FREE. You can pay out-of-pocket
medical expenses from the HSA or simply save it. If you do use the
money from the HSA for medical bills, the money comes out of the
account TAX-FREE.
THE HSA
SAVINGS ACCOUNT IS THE PRACTICAL EQUIVALENT OF
“INSURANCE” COVERAGE FOR THE SMALL BILLS—WHAT YOU DO NOT USE IS
YOURS TO KEEP—Which is dramatically different than PAYING AN
INSURANCE COMPANY A FEW THOUSAND DOLLARS A YEAR TO DO VIRTUALLY THE SAME
THING—INSURE THE “SMALL” BILLS. YOU COULD CERTAINLY SAY THAT WITH AN HSA,
YOU ARE PAYING MEDICAL BILLS WITH MONEY YOU WOULD OTHERWISE HAVE
PAID IN TAXES.
Beginning January 1, 2004 individuals under the age of 65 are
eligible to contribute to an HSA if they have a qualified health
insurance plan. Contributions may be made by individuals, family members
and employers and are tax deductible, even if the account beneficiary
does not itemize.
A qualified health insurance plan for one person must have a minimum
deductible of $1000 with a $5000 cap on out-of-pocket expenses. For
families, $2000 deductible with an out-of-pocket expense cap of $10000.
Both are indexed annually to the rate of inflation.
Individuals age 55-65 can make additional “catch-up” contributions of
up to $500 in 2004, increasing to $1000 annually in 2009 and thereafter.
A married couple can make two “catch-up” contributions as long as both
spouses are at least 55.
What is the maximum annual tax-exempt savings deposit in an HSA?
|
Deductible |
Maximum Annual
Deposit |
Maximum
Monthly Deposit |
| $1,000 |
$1,000 |
$83.33 |
| $1,700 |
$1,700 |
$141.67 |
| $2,600 |
$2,600 |
$216.67 |
| $2,000 |
$2,000 |
$166.67 |
| $3,450 |
$3,450 |
$287.50 |
| $5,150 |
$5,150 |
$429.17 |
Will a traditional high deductible policy qualify? My policy has a
$2000 deductible per person. For my wife an I that would be $4000.
No, that plan will not qualify. The law is specific and
clear. For a family (2 or more persons) the deductible must be one
family deductible (all covered expenses add up to one deductible).
The traditional high deductible policy does not fall within these
requirements.
Is it possible to have a Health Savings Account without the qualifying
insurance? No.
If I start insurance coverage in the middle of the month can I still
fund the deductible to the max?
No,
the deposits are pro-rated by the month, 1/12th per month. So if you
start July 1st , you can only put in 6/12ths of the deductible into
the Health Savings Account.
If I have extra money from time to time, can I fund my HSA savings at
those times or do I have to do it with my regular insurance billing?
Funding the HSA is extremely flexible and the amount is totally
optional. For ease and convenience, the deposit can be added to your
insurance bill or use a deposit envelope and mail a check whenever
you wish. As a matter of fact, you have until April 15th of the
following year to make a deposit to the Health Savings Account
May
Health Savings Account money be used on medical expenses that do not
count as covered expenses under the insurance policy?
Yes. This is another of the great advantages of the Health
Savings Account. The typical person is out-of-pocket a considerable
amount every year for medical expenses that are not covered under
the insurance plan due to the fact that the plan may not cover
dental, or because of deductibles and co-payments. The individual is
presently paying those amounts with after-tax dollars. If you have a
daughter that needs braces for her teeth at a cost of $4000, it
typically means you need to have $6000 in pre-tax income. With a
Health Savings Account, you are going to cut out all of the extra
cost by paying for dental work, eyeglasses, and other expenses not
covered by the deductible with tax-free money from your Health
Savings Account.
Can
HSA money be used for non-medical expenses?
Yes, but money withdrawn before age 65 for non-medical purposes is
subject to income taxes and a 15% federal excise tax.
What
happens to the money in the HSA that I do not spend?
At the
end of the year, the money not spent will simply continue to earn
interest. The interest is not taxable if you use it for medical
expenses.
If I
accumulate a bunch of money, way over the deductible in my HSA, when I
reach retirement age can I use the funds for living expenses?
Yes. At age 65 the HSA functions like a traditional IRA. You
can withdraw money without penalty, paying only normal income taxes.
And after retirement you can still withdraw the accumulated HSA
savings tax-free to pay out-of-pocket medical expenses like nursing
home care or other expenses not covered by Medicare.
click here for an in-depth overview of
how an HSA works...
click here for HSA fact sheet
"What is a Health Savings Account?" - View an on-line PowerPoint
Presentation -
click here
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