Health Savings Accounts are a relatively recent bank account
option, having been created in late 2003 and available to US residents
beginning in 2004. The purpose of a Health Savings Account, also referred to as
an HSA, is to allow for tax-deferred savings that is intended to be used for
current and future medical expenses.Individuals and families may open an HSA,
or Health Savings
Accounts may be offered as part of a workplace benefits package
. In either
case, the rules, contribution limits and eligibility requirements are the same.
Who Can Open An HSA?
HSAs are not available
to everyone; eligibility depends on the type of health insurance plan you
There are different types of health insurance plans
available in the US, ranging from plans that cover every doctor’s visit,
procedure, hospital stay, prescription and surgery, to those that provide
coverage only for significant medical expenses. The former type of plan
understandably costs quite a bit more in monthly insurance premiums, but the
insured knows they will be financially covered for most of their medical needs.
The latter is typically less expensive and also has a higher deductible, which
the insured must pay annually before the insurance will pay for covered medical
expenses. HSA’s are not available to individuals and families covered by the
first type of plan; only to those who have opted for the high-deductible insurance
plan option. An HSA is a way for high deductible insurance plan holders to save
money to use toward their health plan deductibles, and also for health-related
expenses that are not covered by their specific plan. The theory behind these
accounts is that people who are more in control of the money that is being
spent on health care will be more discriminating in the health services they
seek, and will shop more for better prices for the services they need. In this
way, the government is hopeful that the cost of medical care may not rise as
quickly or as dramatically as it historically has, given the more competitive
nature of the industry when consumers are responsible for expenses out of their
In addition to being a high-deductible health insurance plan
customer, the individual who wishes to open an HSA must not be a dependent on
anyone else’s tax return, and also must not be covered under any additional
health insurance plan. There are a few exceptions to the coverage rule; it is
OK to have coverage such as dental, vision or extended-care facility insurance.
How Does An HSA Work?
HSAs have similarities to both regular savings accounts and
to certain types of retirement accounts, but they work quite differently from
both. With a regular savings account, there are no limits to the amount of
money that can be deposited annually. And although banks may have penalties for
the number or amount of withdrawals made within a given time period in some
savings accounts, what you do with the money you withdraw from a regular
savings account is completely your decision. The money you place in a regular
savings account is taxed as income, as is the interest earned on that account.
With an HSA account, money deposited into the account is not taxed as income,
and although you may earn interest in your HSA, the interest is also not
taxable if it remains in the account, or if it is used to pay for qualified
medical expenses. Unlike a savings account, there are limits to the amount of
money that can be deposited into an HSA each year. The total amount that can be
deposited changes annually based on inflation and other factors. It has
gradually risen from $2,600 annually for an individual in 2004 to $3,100
annually for an individual in 2012.For family accounts, the annual limits in
2004 and 2012 were $5,150 and $6,250 respectively. In addition, those over the
age of 55 may deposit an addition tax-deferred $1,000 annually.
With most investment or retirement accounts, the goal is to
save for the future.Like an HSA, there are annual limits to the amount of money
that can be deposited, tax-free, into an IRA or 401K account. With those types
of accounts, there are generally penalties for withdrawing money prematurely,
before retirement age. At the very least, money withdrawn from an IRA or 401K
will immediately become taxable as income in the year it was withdrawn. An HSA
works very differently. Because its goal is to save money for use when needed
for medical expenses, funds may be withdrawn at any time with no tax liability
as long as the withdrawn money is used to pay for "qualified medical expenses”.
Most HSA accounts provide a debit card, checks or both to their HSA account-holders so the money is easily accessible when needed. Account holders
do need to keep good records about their purchases, so they can document each
purchase as a qualified medical expense. This is important, as there are large
penalties when money from an HSA is used for expenses other than what is
considered qualified. That money would be taxable and a 20% penalty would be
imposed upon the account holder.
Are HSA Popular?
The number of HSAs in the US has been
steadily increasing since 2004. For example, in 2006, according to surveys done
by the Employee Benefit Research Institute, there were 1.2 million HSA
accounts. In 2008, the number had risen to 4.2 million accounts, and by 2011,
that number had increased to a total of 6.8 million accounts nationwide.With the tax savings available
through these accounts, as well as the ease of using them, there is no reason
to believe the number of HSA accounts will not continue to grow in the coming
years.HSAs are easy to open and easy
to use. Most local
banks offer Health Savings Accounts
as an option to their customers, and
many will also offer the option for businesses who want to offer HSA’s to their
Where Can I Find Additional Information?
The IRS provides 2 publications related to
Health Savings Accounts; the first explains the rules, eligibility and
usage of the Health Savings Account and the other lists the current Qualified
Medical Expenses. Both should be required reading for HSA account holders
so they can make informed decisions regarding health expenses.