This YouTube video is from insureasy.net.
A Health Savings Account (HSA) is a special account designed to help those with high deductible health plans (HDHPs) pay for their medical expenses tax free. While it resembles a checking account in some ways, it restricts your spending to eligible medical expenses only.
Not everyone qualifies for an HSA. In order to be eligible, you must meet the following requirements:
- Have a high deductible health plan.
- Not be covered by another health plan.
- Not be enrolled in Medicare.
- Not be claimed as a dependent by someone else.
It is important to note that even if your spouse or dependents are not covered under your high deductible health plan, they may still benefit from your HSA, provided that you are covered under an eligible plan yourself.
The way these accounts work is quite simple from the patient’s point of view. Upon visiting the doctor, you do not pay a copay up front. Your insurance company is then sent a bill. They, in turn, send an Explanation of Benefits (EOB) to both you and your doctor detailing the remaining amount (if any) that you owe. You then pay the doctor directly from the funds set aside in your HSA account.
Be sure to keep your bills, EOBs, and bank statements handy in case of an IRS audit. Failure to provide proper documentation could lead to a 20% penalty, plus ordinary income taxes, if they are not paid back by the end of the tax year.
How are these accounts advantageous to you? A high deductible health plan allows one to pay lower premiums in exchange for a much higher deductible than normal. This deductible is then paid down with funds from your tax-protected HSA. In addition, you receive a triple tax savings:
- Your deposits are tax free.
- Your saved money will accumulate tax-free interest over time.
- When used for eligible medical expenditures, all expenditures are tax free.
This account also rolls over from year to year, so you never lose the funds that are deposited. As if that benefit wasn’t enough, the account is portable, meaning you can take it with you from job to job, or even switch to a different bank. Best of all, this money is yours to withdraw penalty-free at the age of 65 for any reason. In this case it is taxed at your current tax rate as normal income.
So with the rising cost of healthcare, HSAs are becoming more and more commonplace. If you find yourself with a high deductible health plan, be sure you know which expenses are eligible and then maximize your HSA so that you maximize your savings!