Health Savings Account Articles / Info

Health Savings Account - HSA: The Basics

In this era of very complex (and very expensive) health care plans, a new one has emerged to help Americans get better care at a better value. This new type of plan is the Health Savings Account, otherwise known as an HSA.

Established by the Medicare reform bill and signed into law in December 2003, the Health Savings Account enables Americans to pay for near-term medical expenses while saving for future long-term costs with tax-free dollars. These accounts come with an HSA-qualified insurance policy that covers major medical expenses and preventive care. Where they differ from traditional health insurance policies is that these HSA-qualified insurance plans have lower premiums, higher deductibles, and the savings from the lower premiums goes to funding the HSA.

What Are HSA-Qualified Insurance Policies?

Also known as HSA-qualified High Deductible Health Plans (HDHP), HSA-qualified insurance policies are more affordable insurance plans that protect individuals and families in the event of major medical illness. These plans generally provide the same benefits as traditional insurance policies, including prescription drug coverage, doctor's visits, emergency room visits, and hospitalization, but they require a higher deductible to be met before benefits are paid. These higher deductibles enable the insurance company to charge much lower premiums.

To be eligible for a Health Savings Account, an individual must be covered by an HSA-qualified HDHP and cannot be covered by other health insurance that is not an HDHP. A person can be eligible for an HSA even if the policy is in the spouse’s name, as long as you have coverage under the HDHP policy (assuming you meet the other requirements for contributing to an HSA). Joint HSA accounts are not permitted so spouses should establish an HSA account in their own name. Also, Americans with government health benefits, (e.g., Medicare, Medicaid, Veterans Administation or Tricare benefits), are generally not eligible for a Health Savings Account. If your employer offers Flexible Spending Accounts (FSAs) or Health Reimbursement Arrangements (HRAs), generally you are not eligible for an HSA, unless the HRA or FSA is a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) plan, then you can still be eligible for an HSA.

Insured banks and credit unions are automatically qualified to handle HSAs. Any bank, credit union or any other entity that currently meets the IRS standards for being a trustee or custodian for an IRA or Archer Medical Savings Account (MSA) can also be a Health Savings Account trustee or custodian. Insurance companies can also be HSA trustees or custodians. If you can't find a bank or credit union to open your account, visit www.hsainsider.com to find companies that will establish your account no matter where you live. Employers may also set up plans for employees.

For 2006, Americans can contribute as much as $2,700 annually for individual coverage or up to $5,450 annually for their family. However, these annual contributions cannot exceed the deductible of the HSA-compatible insurance policy. For instance, if your deductible is $1,100, not more than $1,100 can be contributed in that year. Both individuals and employers may contribute to HSAs. Unspent balances roll over into the next year. Americans age 55 or older (but not yet enrolled in Medicare) are able to make additional "catch-up" contributions of up to $700 per person this year, which can provide extra help to many early retirees.

• HSAs provide people with more control over health care costs. Because you own and control the money in your HSA, you can decide how to spend the money in your account and keep what you do not spend.
• HSAs can also make health insurance more affordable and help businesses lower health care costs. Recent survey results indicate1/3 of small businesses offering HSAs previously did not offer insurance to employees.
• Low- and moderate-income families along with those previously not insured are signing up for coverage. More than 1/3 of HSA enrollers last year had incomes less than $50,000 per year, and 1/3 of individual HSA purchasers were not insured last year.

And growth in HSA enrollments is expected to stay on the rise. The number of Americans with HSAs more than tripled from one million in March 2005 to over three million in January 2006 and is projected to increase to 29 million by 2010. For additional information on Health Savings Accounts, please visit the US Treasury HSA website.