By Katie Banks+ | Monday May 20, 2013
Maybe you’ve heard someone in your HR department talk about HSAs or you saw them mentioned in a magazine article. But somehow the actual meaning of the term HSA still escapes you. Well first, let’s clarify the definition of the acronym. HSA stands for Health Savings Account. And I’ll be blunt: the HSA has a bit of an image problem. You see, many people think the HSA is just for rich people. But let me clarify why that may not actually be the case.
But before we do that, let’s provide a little more detail on the definition. The HSA is a special kind of account that lets the owner keep money in that account, tax free, and then use that money to pay for health related expenses.
Origin of the HSA
The United States Congress created the Health Savings Account to help make health insurance more affordable by giving consumers more visibility into their health care costs, and direct control over and how their health care dollars are spent. Congress figured that, if consumers put their own money into a savings account specifically designed for health services, they might keep a more careful watch over it. Congress also made the account tax free, as long as the funds in that account were spent on approved health related expenses. This is a great additional benefit, which leads us to our next point.
The HSA as a Savings Account
The HSA, as explained above, is established as a type of tax-free savings account, and this feature sets it apart from any other type of health insurance plan. What is important to note, is that if you have a healthy year, meaning that you don’t spend much or all of the money in your HSA, that money is yours to keep. You can roll your money over to the next year. And the next year, and the next. Healthy year after healthy year can add up, and these accounts can even earn a little bit of interest to boot.
Now remember, you must load up your HSA account at the beginning of the year with a sum of your own money to cover your health expenses for the year. Then, as you visit the doctor, you must pay for your own health care costs as you go, until you meet your deductible (more on that later). This is probably where the HSA gets its bad reputation as being “for rich people only.” But consider the following before you judge.
Let’s think for a minute about what you learned above about HSAs, in comparison to a regular health insurance plan. For a regular health insurance plan, you must pay a monthly insurance premium, which is often quite expensive. Then on top of that, you are often required to pay coinsurance and/or copays each time you visit the doctor. But if you have a healthy year and do not use your insurance plan much, you are not able to take back your premiums! Even if you visited the doctor only once for an annual checkup in a given year, you will have already spent hundreds or, more likely, thousands of dollars on health care for that year. If you had an HSA that year, you would only have paid for that office visit. The rest of your money would still be sitting in your HSA.
Now, that is an example of a very healthy year and is for illustrative purposes only. Remember, most years will not be that way, especially if you have children who are always in the pediatrician’s office for pink eye, ear infections, you name it. But it is something to consider.
How Do HSAs Work?
The overall HSA package has two parts. The first is the health saving account, which we talked about above.
The second part is the “High Deductible Health Plan” or HDHP for short. If you decide to you want to go with the HSA, you must first enroll an HDHP. By definition, a HDHP has a high deductible. The deductible is the dollar amount worth of medical expenses that you will be responsible for paying out of your HSA for any given calendar year, after which point your insurance carrier will kick in. The HDHP minimum deductible for 2011 is $1,200 for individual coverage or $2,400 for family coverage (it stayed the same in 2011 as it was in 2010.)
Those are the minimum deductible amounts. Some plans have higher deductibles. One of the most popular of these type of plans is Anthem Lumenos HSA.
HSA Qualified Expenses
When you set up your health savings account, you will get a debit card that looks just like any other bank card. But if you try to use this card for anything not medically related, one of two things will happen: either your card will be rejected or, you will pay a penalty to the IRS. If you somehow use the funds for something not medically related, you’ll pay a penalty to the IRS. So do the right thing and use your HSA card for health related expenses only. Duh.
HSA Contribution Limits
Once you have your health savings account set up, there are annual limits to the amount you can load into the account each year. Here are the 2011 contribution limits (they are the same as the 2010 contribution limits):
• $3,050 for individuals
• $6,150 for families
• $1,000 additional catch-up contributions for anyone age 55 or older
Additional HSA Benefits
There are other benefits in addition to tax planning and the potential for lower payments for insurance. One of them is how you use the money in the HSA account. Some traditional insurance policies have limited coverage for prescription drugs, or no coverage at all for dental or vision care. Since these are all medically related expenses, you can use your HSA card to pay for these, tax-free.
Now you Know What an HSA is!
Now if you hear someone say “What is an HSA, anyway?” you can casually drop in an informed remark, such “Oh, it’s a cost effective method of securing quality health insurance, building assets and directing the money for health care the way the HSA account holder thinks it needs to be spent.” And then go back to smugly sipping your latte and skimming the paper.
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