With the debate over the nation’s health care system still up in the air, there’s no better time than now to learn about the different options that one has, in preparation for possible health care costs that may be faced in the future.
One of the better heath care alternatives that is available now is having a Health Savings Account. HSAs are a good way of reducing your taxes and saving money, while at the same, time giving you the freedom of making your own decisions on how you intend to save and spend for your health care needs. Now more than ever, with health insurance premiums on the rise, a HSA may be the right choice for healthy individuals who don’t need to go to the doctor very often.
While the concept of the Health Savings Account is simple, not many individuals are aware of how these accounts work and how they can be used to reduce their health care costs. Here is an overview of the HSA.
What is an HSA?
A Health Savings Account or HSA, is a tax-exempt savings product where funds can grow for the purpose of paying for qualified medical expenses when needed. It offers consumers an innovative choice for health care financing which works quite differently from traditional health insurance. With an HSA, you will be able to pay for current health costs while at the same time save for future medical needs at a tax-free basis.
Having bigger savings while putting aside funds for health care costs is easy with HSAs because whatever amount you contribute may be deducted from your federal income tax return and in most states, from the state income tax return. In addition, while your employer can also contribute to this fund, it is solely under the ownership of the accountholder and goes with him even if he transfers to another company.
How an HSA works
An HSA works in combination with a High Deductible Health Plan (HDHP). This means that only those who are covered by an HDHP will be able to take advantage of the HSA. The HDHP is a health plan that is available at a much lower cost than usual heath insurance rates. This is because the HDHP does not pay for the first few thousands of your health care expenses, but instead covers you after that, hence it is sometimes called the “catastrophic” health insurance plan.
The savings you get from the lower premiums of the HDHP can then be invested into your own HSA. The HSA can be used to pay for your minor medical expenses such as routine medical, dental, or vision checkups, while the HDHP will cover the more serious illnesses or injuries.
Opening an HSA
Once your HDHP is set up, usually through your employer, you are now eligible to open a Health Savings Account in any financial institution approved by the IRS as an HSA administrator, usually banks, credit unions, and insurance companies.
As soon as you have open your HSA in the bank or institution of your choice, you have two options of funding it: you can make a deposit directly to this account, or arrange for an automatic payroll deduction. Every year, you may deposit up to the equivalent of 100% of your annual health plan deductible. In case you will not be able to use the funds in your HSA for a given year, this will just automatically carry over to the following year, including any interest earned.
Withdrawing from an HSA
When you open a Health Savings Account, the bank or credit union will issue you a starter booklet of checks or a bank debit card so that you can have easy access to your account for qualified medical expenses. You will also receive an Identification Card which you will show your providers when availing of their services, and a Certificate of Coverage that outlines your health plan in detail.
With the combined benefits and affordability of the HSA and HDHP, about 2.5 million individuals who were previously uninsured were able to avail of health coverage as of January 2008. Isn’t it time you explore this health financing option as well?