Features of Health Savings Accounts

By Compuquotes Team on March 27th, 2008
Health Insurance

Health Savings Accounts (HSAs) are very similar to Investment Retirement Accounts in the way they work, and also share some features with conventional health insurance.

An HSA is essentially a savings account to which the account owner can make non-taxable contributions up to a yearly limit. The owner can make withdrawals at any time for the purpose of paying medical expenses. Withdrawals for qualified medical expenses are not taxed. Once the owner of an HSA reaches 65, they can withdraw the savings for any purpose without penalty.

Owning a Health Savings Account has three eligibility criteria: the owner must be under 65 at the time of creating the account, and the owner must also own a High-Deductible Health Plan (HDHP) that qualifies under HSA requirements. HDHPs are insurance plans with low premiums and a high deductible. The third requirement is that the HSA owner must not be covered by any other active healthcare plans.

Unique Features of Health Savings Accounts

One unique and particularly interesting feature of HSAs is that the money held within the account can be invested, in the same way as the money held within an IRA can be invested. The same types of restrictions and rules apply to an HSA in terms of investing money and deferring taxes on money earned by the account. For example:

  • All money earned by investments made using HSA funds are non-taxable as long as the money remains in the account, or is withdrawn to pay medical expenses.
  • Taxes must be paid if money earned by the account is withdrawn for non-medical purposes (if the owner of the account is under 65).
  • Making contributions to an HSA allows you to reduce your income taxes (because contributions are made using pre-tax dollars).

Another interesting feature of the combination of the HSA and HDHP is that the owner of the account can use HSA funds to pay for their yearly deductible, and to cover medical expenses not included in the policy.

In addition to these benefits, note that there is a limit on how much you can contribute to an HSA in a single year. For individuals, the limit is $2,850, while for a family group HSA the limit is $5,650.

What's covered by a Health Savings Account?

HSAs cover a much more extensive list of medical expenses than traditional healthcare plans. Included for coverage by HSAs are the following:

Dental treatment
Mental therapy, including psychology, psychiatry, and psychotherapy
Physical therapy (including chiropractor visits)
Alternative healthcare (such as homeopathy and acupuncture)
Preventative healthcare visits
Maternity expenses (that are not covered by the HDHP)
Prescription and nonprescription drugs
Travel and accommodation costs relating to healthcare

Who Benefits from HSAs?

HSAs are a great option for people who want flexible healthcare they can manage themselves without having to complete large amounts of paperwork or worry about visiting network healthcare professionals.

The ability to use the funds in the account for any purpose once the owner reaches 65 means that unlike many other health insurance options, HSAs can benefit almost anyone, including those with continual medical expenses as well as people who are generally healthy and have few ongoing costs.

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