Health Savings Accounts are a tax deductible, interest bearing accounts designed to assist in paying your medical expenses tax free.
An HSA is designed to work with a qualified High Deductible Health Plan (HDHP). The funds in your HSA can help pay for medical expenses both covered and not covered by your health plan, including your deductible and co-insurance on the qualified plan. An HSA is your account. When used to pay your medical expenses, all of the money you contribute is tax-deductible and goes with you when you retire or change jobs. In this way, an HSA is portable.
A High Deductible Health Plan (HDHP) is a full major medical health insurance plan with maximum out-of-pocket limits and minimum annual deductibles. The requirements of a qualifying High-Deductible Medical Plan are determined by the Internal Revenue Service (IRS). These requirements are subject to change each year. There are several tax benefits of an HSA:
- Cash contributions made to an HSA during a tax year are deductible from your federal gross income.
- Contributions made through a payroll deduction are made, free of tax, by employees.
- Contributions made by an employer are also not included in your gross income for tax purposes.
- Withdrawals from your Health Savings Account for qualified medical expenses are free from federal income tax. With the average American being taxed at 28%, this can translate into a tremendous savings.
- If your HSA is interest bearing, the earnings are tax-deferred, and you will never pay federal taxes on them if the money is used on qualified medical expenses.
- Tax benefits for individuals and families may vary from that of employers. Check with a licensed agent to find out which tax benefits apply to you.
A Qualified Medical Expense is defined by the IRS and the expenses must be to primarily alleviate, or prevent, a physical or mental defect or illness. Here are a few examples:
- Prescription Drugs
- Physicians office visit
- COBRA and long term care premiums
- Durable medical equipment
- Eyeglasses, contact lenses, LASIK and other vision care
- Birth control pills
- Chiropractor services
- Dental and Vision care
- Hearing aids
- Smoking cessation, and weight-loss program
HSAs were created by the Medicare bill signed by President Bush on December 8, 2003, and was designed to expand access to health care by helping individuals save for future qualified medical and health expenses on a tax-free basis. An individual who is covered by a High Deductible Health Plan can make a tax deductible contribution and use it to pay for out-of-pocket medical expenses.
