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Lesson 6: All About Health Savings Accounts
Before 2005, the only people eligible for a Medical Savings Account were the self-employed. Since 2005, Medical Savings Accounts (MSAs) have now become Health Savings Accounts (HSAs), and are available to everyone. HSAs are about the best thing to happen to health insurance since health insurance itself became available.
HSAs are not only great for individuals, but for employer�s, too. In a nut shell, a Health Savings Account is a better way to save (and compound!) your money for your future�better, even, than your standard IRA or 401(k)! You can add to it with pre-tax dollars and draw from it also without paying taxes. While your money is in this account, you can manage it like your IRA or 401(k).
This is such a great deal that there is a cap on how much you can put into this kind of account. For 2006, this cap is $2,650 for an individual and $5,250 for a family each month. Because you can place this money in your account and spend it on medical expenses without ever having to pay any taxes on it, you can save about 1/3 on your medical expenses starting on day one.
In order to have an HSA, you must first have an HSA qualified insurance policy. An HSA qualified policy will always have a fairly high deductible of $1,000 to $2,650 for individuals in 2006. Though there is always a high deductible, there are allowances for first-dollar coverage for certain services. These services include:
Screening services, (like mammograms)
Periodic doctor visits, including pre-natal examinations
Preventive or wellness care, including drugs that prevent a disease which has not yet presented itself
Tobacco quitting programs
Weight-loss programs
Accidents
Immunizations
There are different ways that you can make contributions to your HSA, each with their own important and significant tax benefits.
If you make the contribution yourself with after tax dollars, then you can receive a 100% above the line deduction.
If the contribution is paid to you from your employer as a part of your salary, then the money is paid in the account in pre-tax dollars, and can be withdrawn for approved medical expenses without ever paying any taxes on that money. Notice that there is no time requirement on this money. As soon as your employer pays into your HSA, you can withdrawn it immediately to pay for medical expenses WITHOUT PAYING A DIME IN TAXES! (Yes, this is legal!) If you go this route, your employer is able to claim a full deduction from its taxable income for all monies contributed into your HSA.
So, step 1 is to purchase an HSA-qualified insurance policy. Step 2 is to open a Health Savings account. Our friends at eHealthInsurance can help you find the best high-deductible health insurance policy for your needs.
Next: Lesson 7: let's start comparing health plans
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