Health Insurance Basics - All About Health Savings Accounts (HSA)

A Health Savings Account is an account that is owned by an individual used to pay for current and future medical expenses. These accounts are offered in conjunction with a “High Deductible Health Plan.”

High Deductible Health Plans are health insurance policies that do not cover first dollar medical expenses, other than preventative care. They can also be a:

• HMO
• PPO
• Indemnity plan

Health Savings Accounts were created by the December 8, 2003 Medicare legislation that was signed into law by President Bush. These accounts are modeled after Archer MSAs.

Individuals who are eligible for HSAs include those that are:

• Covered by an HDHP
• Not covered by health insurance
• Not enrolled in Medicare
• Can’t be claimed as a dependent on someone else’s tax return

There are no income limits that contribute to HSAs and people are not required to have earned an income to contribute to an HSA.

There are certain types of medical benefits that will make you ineligible for an HAS. These are typically referred to as “1st dollar” medical benefits, such as:

• Medicare
• Flexible Spending Arrangements
• Health Reimbursement Arrangements
• Tricare Coverage

A high deductible plan is a health insurance with a minimum deductible that is $1,100 for individual coverage and $2,200 for family coverage. Annual out-of-pocket is limited and includes deductible as well as co-pays and are set at $5,500 for individuals and $11,000 for family coverage. All covered benefits in a plan must apply to the plan deductible and include prescription drugs.

If HDHP provides prescription drug benefits, then the prescription drug expenses must be subject to a deductible or the individual may not contribute to the Health Savings Account.

In a high deductible plan, preventative care does not include any service or benefit that is intended to treat an illness, condition or injury that is already in existence. There are certain drugs and medications that can be considered preventative care. These drugs are drugs such as cholesterol-lowering medication for individuals who are suffering from high-cholesterol.

Contributions to a HAS can be made by either the employer or individual and both. If the contributions are made by the employer, the amount is not taxable. If the contribution is made by an individual, the amount is considered an “above the line” deduction.

If others make contributions on behalf of the individual, these contributions can be deducted by the individual as well. As of 2007, individuals are allowed a one-time transfer from their IRA to an HAS as well. There are maximums that are set at $2,850 for self-only coverage and $5,650 for family coverage. Once an individual is enrolled in any type of Medicare, they cannot receive contributions to their account.

Although there are numerous benefits to Health Savings Accounts, there are also a few drawbacks. The main drawback is that you must have your deductible paid before you can receive benefits from your health insurance policy. Although these accounts pay for your basic preventative care, there are certain areas afterwards that may not be covered.

These plans often tend to benefit only two groups of people, those that are very healthy and those that are very ill. This is because you typically don’t have to pay for many medical expenses. At the same time, those who are very ill and do have large medical expenses on a monthly basis. However, once your deductible is met, the plan will pay for medications with the same co-pay as your other medical expenses.