The Advantages of Owning an HSA-compatible High Deductible Health Plan

More and more Americans are enrolling in health savings accounts (HSAs). The rising popularity of HSAs can be attributed to a number of factors - an array of tax advantages, plan portability and accounts that roll over each year for future use. Have you discovered the advantages of owning an HSA?

What is an HSA?

HSAs were created by the Medicare bill signed in 2003 to help eligible individuals save for qualified medical and retirement health expenses on a tax-free basis. Interest earnings are tax-deferred and withdrawals are tax-free, provided they are used for current and future "qualified medical expenses" (such as routine physical exams, coinsurance costs for health care, prescription drugs and dental plans, hearing aids and batteries, eyeglasses, contact lenses and solution, laser eye surgery, stop-smoking programs, long-term care insurance premiums and more).

What are the Advantages of Owning an HSA?

HSAs offer an array of attractive tax benefits:

  • Each year the individual or employer can fund the HSA account up to the amount of the plan deductible and receive a tax deduction for the contribution amount. This deduction is applicable to those who take the standard deduction instead of itemizing as well
  • Withdrawals from the fund are tax-free if used for qualified medical purposes
  • Interest earned on the HSA or by self-directing funds is tax-free
  • Long-term care insurance premiums can be paid as a qualified medical expense from the HSA
  • Primary and supplemental health insurance premiums (other than Medicare Supplement insurance) can be paid as a qualified medical expense from the HSA upon Medicare eligibility

In addition, HSAs offer these key advantages:

  • In most cases, the premiums are lower for high deductible health plans
  • Money remaining in the HSA account at the end of the year rolls over to the following year
  • HSAs are owned by the individual and are portable
  • Beginning at age 65, HSA participants may withdraw unused HSA funds as regular income without incurring tax penalties

How do I Establish an HSA?

You must have an HSA-qualified high deductible health plan to open or contribute to an HSA. It's important to note that not all high deductible health plans are HSA-qualified. The list below details the characteristics of an HSA-qualified high deductible health plan:

  • Minimum deductible of $1,050 for self-only coverage
  • Minimum deductible of $2,100 for family coverage
  • Maximum out-of-pocket limit (including deductibles and co-pays) of $5,250 for self-only coverage and $10,500 for family coverage
  • Preventive care (i.e., annual physicals, mammograms, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs and obesity weight loss programs) may have first dollar coverage
  • Co-pays may be applied to preventive care
  • Higher out-of-pocket (co-pays and co-insurance) is allowed for out-of-network care
  • The words "Qualifying High Deductible Health Plan" or a reference to IRC Section 223 will be included in the declaration page of the insurance policy or another official communication from the insurance company that accompanies your policy

As you can see, there are many advantages to owning an HSA-compatible high deductible health plan. In addition to the numerous tax advantages, they offer low health insurance premiums, you can roll over unused funds into the next year, they are individually owned and portable and you can begin withdrawing unused funds without incurring tax penalties once you turn age 65. Is an HSA-compatible high deductible health plan right for you?

Content provided by the United States Department of Treasury (treas.gov).

This information is provided for InsWeb users' general information. InsWeb makes no representation as to the information's completeness or accuracy. We urge you to contact your insurance professional directly for specific information and instructions.