How Do Health Savings Accounts Work?

Health Savings Accounts (HSAs) are considered by many to be the future of health insurance in America. HSAs are tax-free savings vehicles that have been effective since January 2004.

You qualify for an HSA if you are under 65 years of age and have purchased a High Deductible Health Plan (HDHP). You should not be holding another policy that is not an HDHP.

An HSA has two components: a savings account and the HDHP. The money accrued in your roll-over interest-generating savings account can be used for medical situations such as dental checkups, purchase of medicine, etc. The savings account money can also be used for medical conditions not covered under the HDHP schemes. These withdrawals are tax-free and once you retire they can be used for any purpose, not just medical expenses. Also the deposits are tax-deductible, so you get to keep more of your money.

At present the HSA rules stipulate that you can choose any HDHP provided it is compliant with IRS requirements. The deductible amount for HDHP for the year 2009 has been fixed at $1,150 for individuals. HDHP policies can be purchased independently or through the employers. The HDHP plan that you purchase covers for expenses that go beyond the amount in your health savings account. Because the deductible is high, premiums are automatically low. This makes HDHP available to a large cross-section of the American population. The HDHP coverage begins once you have reached the max limit for out-of-pocket expenses, at present this is set at $5,600, which means that once you have spent this amount on your medical expenses, the HDHP plan will take care of any further medical costs for the rest of the year.

Banks, insurance companies, and credit unions are ideal places to set up a health savings account. You can even set it up via your employers.

As mentioned above, an HSA is a great vehicle for saving as well as an admirable health insurance option. This said, an HSA works best when you don’t touch the money and let it accumulate. This means that HSAs may not be the best option for those that have frequent medical expenses. Also the out-of-pocket maximum may be more than what some individuals may be willing to pay. The extent of coverage provided by an HSA may also not be as comprehensive as that offered by conventional health insurance plans.

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How Do Health Savings Accounts Work?

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