The ABCs of HSAs

Author: Megan R Stell Date: February 12, 2007

Many consumers may be confused by health savings accounts, high-deductible health insurance plans coupled with IRA-style savings accounts. In reality, they're pretty simple and are getting more and more popular.

What is an HSA?
HSAs were developed to maximize your savings on health insurance while providing you with a valuable tax break. An HSA program has two parts: an eligible, high-deductible health-insurance plan and a tax-advantaged savings account. For an individual, an HSA-eligible health-insurance plan must have an annual deductible of at least $1,050––which means you'll have to pay the first $1,050 of medical expenses before your health coverage kicks in.

The second part of an HSA program is an IRA-style savings account that allows you to reduce your taxable income by building savings. You can deposit funds up to the total of your health plan's annual deductible into the HSA-account each year. So, within certain regulatory limits, the higher your health plan's deductible, the more you can tuck away tax-free.


What health benefits can I expect?
Online health insurance agent eHealthInsurance recently released a report detailing the plan benefits for HSA-eligible health plans. The benefits provided are surprisingly rich. Here are some interesting facts from the report Health Savings Accounts: January 2005 - December 2005:

  • Nearly 80 percent of the plans had 100 percent coverage, after the deductible, for X-rays/lab, hospitalization and surgery
  • At least 83 percent of the plans had some type of prescription drug benefit

How does the tax savings work?
If you make $40,000 a year, and you put $2,000 in your HSA, you'll pay taxes only on $38,000. What happens to that $2,000? Like an IRA, the HSA is meant to encourage you to save for retirement. Funds placed into your HSA can be invested to earn tax-free income, and the balance will roll over from year to year until retirement age. But unlike an IRA, you can use your HSA funds to cover medical expenses without penalty. The funds in the account may be used to cover any qualifying medical expense, which in many cases includes over-the-counter drugs and eyeglasses, as well as co-payments and any medical costs incurred before your annual deductible is met.  

Who buys HSA-eligible plans?
The eHealthInsurance report also included interesting information on the types of people who have purchased HSA-eligible health-insurance plans. Contrary to many skeptics who assumed that HSA purchasers would be only the young and wealthy, findings show that is not the case. Here are some interesting findings on HSA-eligible health plan purchasers:

  • Their average age is 38.
  • Forty-five percent of them earn $50,000 or less per year.
  • More than 40 percent of them were previously uninsured.
  • At least 95 percent of them pay $200 or less per person per month.

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