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What Is A Health Savings Account
(HSA)?
A Health Savings Account is an alternative to traditional health insurance; it is
a savings product that offers a different way for consumers to pay for their health
care. HSAs enable you to pay for current health expenses and save for future qualified
medical and retiree health expenses on a tax-free basis. You must be covered by
a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP
generally costs less than what traditional health care coverage costs, so the money
that you save on insurance can therefore be put into the Health Savings Account.
You own and you control the money in your HSA. Decisions on how to spend the money
are made by you without relying on a third party or a health insurer. You will also
decide what types of investments to make with the money in the account in order
to make it grow. The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 added section 223 to the Internal Revenue Code to permit eligible individuals
to establish health savings accounts (HSAs) beginning January 1, 2004. An HSA allows
individuals to pay for eligible health expenses and save for future qualified medical
and retiree health expenses on a tax-free basis. An HSA is similar to an Individual
Retirement Account ("IRA"). Like an IRA, an HSA is established for the
benefit of an individual, is owned by that individual, and is portable. Thus, if
the individual is an employee who changes employers or leaves employment, the HSA
stays with the individual. However, an IRA cannot be used as an HSA nor can you
combine an IRA and an HSA in a single account.
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What Is The History Behind
HSA's?
HSAs began as a pilot program in 1996. The early versions went by the names Medical
Savings Accounts or Archer Savings Accounts. Approximately 1.5 million Americans
took part in this program. By 2001, it proved to be a success, and Congress decided
to open up the program further. Beginning on January 1, 2004, individuals under
the age of 65 are eligible to contribute to an HSA if they have a qualified health
plan.
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Is There A “Use It Or Lose
It” Provision With An HSA?
Amounts contributed to an HSA belong to individuals and are completely portable.
Every year the money not spent stays in the account and gains interest tax-free,
just like an IRA. Unused amounts remain available for later years (unlike amounts
in Flexible Spending Arrangements that are forfeited if not used by the end of the
year).
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Who Is Eligible To Open An
HSA?
To be eligible for an HSA, you must: (1) Be covered by a high deductible health
plan (HDHP) (2) Not be covered by other health insurance, whether as an individual,
spouse, or dependent (this restriction does not apply to insurance for specified
illness or disease or accident, disability, dental care, vision care, long-term
care or hospitalization insurance). (3) You cannot be enrolled in Medicare or Medicaid,
nor can you be claimed as a dependent on someone else's tax return.
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What Is A High Deductible
Health Plan?
A high deductible health plan meets the following criteria: (1) For self-only policies,
a qualified health plan must have a minimum deductible of $1,100 with a $5,500 cap
on out-of-pocket expenses. (2) For family policies, a qualified health plan must
have a minimum deductible of $2,200 with a $11,000 cap on out-of-pocket expenses.
Out-of-pocket expenses include deductibles, co-payments, and other amounts the participant
must pay for covered benefits, but do not include premiums. High deductible health
plans can have first dollar coverage (no deductible) for preventive care and higher
out-of-pocket expenses (copays & coinsurance) for non-network services. In order
to create an HSA, you need to own an insurance plan that has a deductible that is
considered high. Many people already own a plan that qualifies or will do so in
the near future due to the lower premiums that such plans offer. You must have an
HDHP if you want to open an HSA.
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