Health Savings Accounts: A Different Way to Pay for Healthcare

What Is a Health Savings Account?

A Health Savings Account (HSA)1 is a savings vehicle that allows individuals to pay for current—and save for future—qualified health care expenses on a tax-free basis. An HSA must be used in conjunction with a High Deductible Health Plan (HDHP)—a medical plan with higher deductibles and lower premiums than traditional health plans.

How HSAs Work

  • Organizations that include an HDHP in their benefit package often offer them in conjunction with an HSA—since individuals can use the money in their HSA to cover medical expenses that are not reimbursed or covered by the HDHP.
  • Contributions can be made to an individual’s HSA by the individual, the employer, or both.
  • Individuals’ HSA contributions are tax deductible—even if deductions aren’t itemized on the federal income tax return.
  • Individuals can use the money in their HSA tax free for qualified medical expenses2 (for themselves, their spouse, and their eligible dependents) at any age. The spouse and dependents do not have to be insured under the HDHP.
  • Anyone under age 65 who buys a qualified High Deductible Health Plan can open an HSA.
  • The account owner may decide how to allocate the HSA funds—without having to rely on a third party, such as a health insurer.
  • When an HSA account owner retires or separates from service, similar to a retirement plan, the money in the HSA may remain in the existing account—although if HSA funds are used for non-medical expenses before age 65, a 10% penalty will apply, in addition to any tax liability.

HSA Contribution Limits

  • Individuals can contribute up to $3,100 to an HSA in 2012, or up to $3,250 in 2013. Those between ages 55 and 65 can make an HSA catch-up contribution of $1,000.
  • The contribution limit for families is $6,250 in 2012, or $6,450 in 2013.
  • Individuals ages 66 and over cannot make new HSA contributions.3

Once the Account Owner Is Retired…

  • Any surplus in the HSA (i.e., money not used for medical expenses) may be used to supplement the account owner’s retirement income or pay for health care expenses throughout retirement. No taxes are payable on HSA funds as long as the account owner is 65 or older when withdrawing money from the account.
  • HSA funds may be used to pay for Cobra Premiums, nursing care, or to purchase a long-term care policy.

After the Account Owner Has Passed Away…

  • If the HSA beneficiary is the account owner’s spouse, he or she can continue to access the HSA funds tax free for medical expenses—but must pay income taxes on any HSA funds used for non-medical expenses.
  • If the HSA beneficiary is anyone other than the account owner’s spouse, he or she will generally owe taxes upon receipt of the HSA assets (which become part of your estate), although no additional penalty will apply.

The Advantages of HSAs

HSAs offer numerous benefits for those looking to cover their health care-related expenses—over the short and long term. These include:

  • Greater financial security: An HSA provides a tax-advantaged way for individuals to handle unexpected or high medical bills.
  • Affordability: Most HDHP health insurance premiums are lower than premiums with traditional medical plans.
  • Flexibility: HSA funds may be used for medical expenses today—or any time in the future. HSAs do not have a "use it or lose it" provision.
  • Control: An HSA gives individuals greater control over how their HSA funds are spent. And the HSA is portable, even if the individual changes jobs or medical plans, moves, changes marital status, or retires.
  • Tax savings: HSAs provide individuals with tax savings three ways—through:
    • Tax-deductible contributions;
    • Tax-free investment earnings; and
    • Tax-free withdrawals for medical expenses.

How to Set Up Your Own HSA

If your workplace does not offer an HSA, you may be able to set up your own account through a bank, credit union, or insurance company.

An HSA is an excellent way to pay for current health expenses—while saving, on a tax-free basis, for future qualified medical expenses and retirement income.

To Learn More…

Be sure to visit the Department of Treasury’s Health Savings Accounts page.

1 Some workplaces offer a Health Savings Account along with—or in place of—traditional health insurance. Some organizations choose to fund all or part of the HSA for employees—perhaps even adding a 401(k)-style match—giving employees the ability to take advantage of employer-funded contributions.

2 Includes most medical care and services, dental and vision care, and over-the-counter medications.

3 Individuals enrolled in Medicare Part A or Part B may not contribute to an HSA.

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