The U.S. Congress recently passed legislation which makes paying for medical expenses much more affordable for consumers. As of January 1, 2004, the new law provides broad access to Health Savings Accounts, which allow consumers to pay for qualified medical expenses with pre-tax dollars (income-tax free!) and save for retirement on a tax-deferred basis.



A Health Savings Account (HSA) is a tax-favored saving account that is used in conjunction with a high-deductible HSA-eligible health insurance plan to make healthcare more affordable and to save for retirement.

HSAs are similar to IRAs, but even better:
- Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65.
- Any HSA funds not used each year remain in the account, and earn interest tax-free to supplement medical expenses at any time in the future.
- Like an IRA, the account belongs to you, not your employer. But unlike an IRA, your employer CAN contribute to your HSA.


Why should I get an HSA?
You can save money in the short and long term by:
- Deducting 100% of your HSA contributions from your taxable income
- Having the money in your HSA accrue interest and/or gains on a tax-free basis
- Paying no penalties or taxes when you use your HSA to pay for qualified medical expenses
- Having a high-deductible HSA-eligible health insurance plan, which typically has a lower premium
than a plan with a lower deductible


What are qualified medical expenses?
HSAs can be used to pay for many types of medical expenses, even some that are often excluded on health insurance plans.
- These include:
- Contact Lenses
- Chiropractic Procedures
- Acupuncture
- Wellness Visits
- Birth Control Pills
- Dental Care

Typically HSAs cannot be used to pay health insurance premiums, although there are exceptions for:
- Health insurance premiums if you are receiving federal or state unemployment benefits
- Premiums for COBRA qualified health insurance
- Long-term care insurance premiums
- Premiums for a health plan (other than a Medicare supplemental policy) for an individual age 65 or older


What insurance plans are HSA-eligible?
In order to have a Health Savings Account, you must get an HSA-eligible health insurance plan. This type of insurance plan is often referred to as a High Deductible Health Plan (HDHP), and is typically less expensive than plans with lower deductibles.

A health insurance plan must meet the following criteria to be considered HSA-eligible: The health insurance plan must have an annual deductible of at least $1,000 for individuals and at least $2,000 for families.
The sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than premiums) does not exceed $5,000 for individuals and $10,000 for families.


How much can I contribute to my HSA?
Maximum yearly contributions (and associated tax deduction) are determined as follows: For individuals, it is the lesser of:
a) $2,600
b) Your health plan's annual deductible*

For families, it is the lesser of:
a) $5,150
b) Your health plan's annual deductible*

You do not have to contribute the maximum each year, although some HSAs require a small minimum monthly deposit.

Note: If you are between the ages of 55 and 65, you can make an additional annual "catch up" contribution (of up to $500 in 2004.)

*If you enroll in an HSA-eligible health plan in the middle of the calendar year, your maximum contribution for the first year will be prorated based on the number of months you have the HSA-eligible health plan. For example, if your individual health plan's annual deductible is $3600, and you enroll in the HSA-eligible plan on June 1st, then your maximum contribution for the first year can be up to $2100 (i.e. 7/12 of $3600). If you are enrolled for all twelve calendar months, then you can contribute the amount of the deductible up to the annual maximum allowed ($2600 in Year 2004).


Is my money safe?
Funds in an HSA are held in a trust and are administered by a bank, insurance company, or other approved Trustee.
Funds in your HSA are invested at your discretion. Typically an HSA will allow you to choose from the following options:
- Interest-bearing account
- CDs
- Money market funds
- Mutual funds
If you are looking to minimize your investment risk, you may want to consider an interest-bearing account; these accounts are FDIC insured. On the other end of the spectrum, mutual funds may provide a greater return, but are more risky, and are not FDIC insured.


How do I use the funds in my HSA?
Using funds in your Health Savings Account is easy:
- Typically an HSA will provide you with a checkbook or debit card. When you pay for a qualified medical expense, use the debit card or check to make the payment.
- You do not need to get approval from the HSA administrator when you use funds in your account.
- You do not need to submit receipts to the HSA administrator, although you should save them just as you keep receipts for other items that are deducted from your taxes.
NOTE: You must establish the HSA before you incur medical expenses otherwise the expenses will not qualify.


How do the tax savings work?
HSAs make it easy to save on your taxes:
- At the end of each year, you will be sent a statement showing the amount you contributed to your HSA that year. You can deduct this amount provided it is less than or equal to the maximum allowable contribution.
- Much like an IRA, HSA deductions are "above-the-line" and thus can be taken even if you do not itemize.
If you are self-employed, in addition to deducting your HSA contributions, you may be able to deduct 100% of your health insurance premiums, provided that:
- You are not eligible to participate in a subsidized health plan offered by an employer or your spouse's employer.
- The deduction does exceed the amount of net income from your business.





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