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Health Savings Bank Account Explained
By Brad Stroh
What is a Health Savings Bank Account?
Increases in the cost for health care and health insurance now
impact both employees receiving their health insurance through an
employer group plan and the self-employed seeking individual and
family health insurance. Whichever group you fall into, you've
probably noticed the rising costs of health insurance. Deductibles
and other out-of-pocket expenses have risen to the point that,
without careful planning, they can put a serious financial strain on
the average American family. In December of 2003, the government
took steps to ease the burden on working people when it comes to
paying for their health care. The resulting legislation established
the Health Savings Bank Account.
A Health Savings Bank Account, or HSA, is an account that allows you
to save your pre-tax money for out-of-pocket medical expenses.
Unlike a flexible spending account (FSA), any money left over at the
end of the year can be saved and used for following years. The money
may also grow through investments, just like the funds in an IRA,
depending on how and where you establish your account.
Health Savings Bank Accounts are specifically designed for people with
high-deductible insurance plans who do not have any other
first-dollar medical coverage. Coverage specific to injury,
accident, disability, dental, vision and long-term care insurance is
permitted, however, without affecting eligibility for an HSA.
Exceptions are those eligible for Medicare (over 65) and anyone who
can be claimed as a dependent on someone else's tax return.
Individuals in these categories will not be able to open a Health
Savings Account.
How to Establish a Health Savings
Bank Account
Your bank, credit union, and insurance company are a few places
that can serve as trustees for your Health Savings Bank Account. Any
financial institution that handles IRAs or Archer MSAs may also
offer the accounts. Once the account is set up, you and/or your
employer may make regular deposits up to your allowed deposit
amount. This amount is determined by the size of your annual health
insurance deductible.
Once you've established the account, you'll have a great deal of
flexibility. You can choose to use the money for all or part of any
qualified out-of-pocket medical expense. Qualified expenses range
from co-pay and deductible amounts to prescriptions and even
over-the-counter drugs such as aspirin and cold medicine. Insurance
premiums generally are not approved; however, premiums for dental,
vision, disability and long-term care may be eligible.
Health Savings Account Funds
The funds in the account belong to you and can be rolled over
into some other tax-advantaged accounts such as an IRA if you so
choose. You can use the funds for qualified medical expenses until
you turn 65. You can also draw on your funds at any time for
non-medical expenses; however, you will have to pay income tax on
the amount as well as an additional 10% penalty for withdrawing the
funds for non-medical purposes. After you reach age 65 you must
withdraw the funds or roll them over penalty-free.
How you use your Health Savings
Bank Account is up to you. You may view it as a way to
save in the short term to pay for your out-of-pocket medical
expenses year to year, or you may decide that you'd rather use the
account to accumulate funds toward the medical expenses you'll incur
in your retirement before age 65. Either way, the HSA is a new
resource that may make the cost of health insurance less burdensome.
About the Author
Brad Stroh is currently co-CEO of Freedom Financial Network and
Bills.com. If you would like more
of Brad's articles,
please visit the Bills.com information on
Money.
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