Health Savings Account

What is a Health Savings Account?

The Health Savings Account is an alternative to traditional health insurance. It represents a saving plan for future health and dental care costs when combined with a high deductible or catastrophic health insurance plan.

High deductible health insurance normally has a much lower monthly premium than traditional plans. The insurance company can do that by limiting coverage and by providing a large deductible before benefits are paid. The HSA is intended to help fill the gap in coverage by allowing the employee to save for future needs.

The U.S. Department of the Treasury provides this HSA FAQ.

How do I fund an HSA?

When part of an employee’s benefits package, the HSA is funded by deductions from the employee’s paycheck. Many employers will set up their HSA plan as a cafeteria plan which allows the money contributed to being tax-free. Some employers will also contribute to an employee’s HSA and that money may also be tax-free to the employee. There are limits, that do change, on how much may be placed into these accounts per year.

A Health Care Saving Account can also be arranged through banks, credit unions, and other financial institutions as well as insurance companies.

The law provides many ways to fund a Health Savings Account. It could be a yearly one-time payment. It could be regular deductions from the employee’s paycheck. It could be a monthly check written to the plan provider. The law also provides for employees over age 55 to make a “catch up” payment above and beyond the yearly limit.

Who owns and who runs the HSA?

The employer provides the plan or plans for an employee to choose from. The employee owns the account and is able to select how the money is invested. The plan is run by an insurance company. The only cost to the employee may be a fee from the company operating the HSA.

What can be done with money in an HSA?

The company operating the plan should provide a list of expenses that the money may be used for. In reality, the money can be withdrawn for any use, but if it is not a use provided for in the law the dollars used become taxable income to the employee.

The funds are intended to fund health expenses before the health insurance plan kicks in and to cover co-pays and deductibles. They are also usable for some medical costs not normally covered by health insurance. These funds may be used to pay Medicare Parts A and B premiums.

As part of the Affordable Care Act changes were made in what expenses qualify under the HSA. Beginning in January 2011, over the counter drugs are no longer covered unless prescribed by a physician.

CIGNA has a good website on which expenses are covered and which are not. The Treasury Department answers many questions at this website.

Should I open a Health Care Savings Account?

Money placed in an HSA will remain there until withdrawn or lost through investment. The account cannot be created if the individual or family has some sort of standard health insurance coverage. Each person must balance their coverage needs with the savings in lower insurance premiums and taxes that having a high deductible health policy and an HSA provide. Such decisions should weigh carefully all the risks and benefits, and professional advice may be sought.

For younger unmarried individuals in good health and no pending health issues, the Health Savings Account presents a good way to save for future health needs. A decade of such savings with little or no need to draw on the funds represents a sum that will be available for family health costs or retirement health costs.