Health Savings Accounts (HSAs)
Health Savings Accounts came into existence on December 8, 2003 when
Predisdent George W. Bush sign the Medicare bill establishing it as law.
The basic idea is:
- You carry relatively inexpensive, high-deductible health insurance
- You open a Health Savings Account (bank, credit union, etc.)
- You deposit what you save on insurance premiums into the HSA
Then when there is a medical expense:
- You pay your deductible expenses out of the HSA
- Once your deductible is reached, your insurance covers your expenses
Sounds like it provides the same benefit of higher-cost, low-deductible
health insurance, right? So what is the benefit?
If you do not reach your deductible in any year, or more specifically
you do not use all the money that you put into your HSA, then you have that
money to use for the next year - it carries over.
Previously you could not deposit more into your HSA than
your annual deductible. However, the Health Opportunity Patient Empowerment
Act of 2006 changed that. The limit is now set by statue only.
|Tax Year 2020|
|Under Age 55||$3,550||$7,100|
|Age 55+||Additional $1,000|
|Amounts indexed for inflation.|
The HSA will grow in value as it earns interest or otherwise has gain
due to dividends or capital gain, depending on how the money is invested.
In time (future years) you can save sufficient money to allow you to reduce
your contributions, thus saving on your medical expenses.
You take a tax deduction (on your federal tax return) for money deposited into your HSA.
When you withdraw money for medical use it is not taxable. (You must
maintain records to substantiate this in case of an audit.)
And the down-sides?
Unfortunately, if you incure medical expenses before you have sufficient
money in your HSA then you must pay those expenses from other funds
or finance it through the provider or other source.
If you withdraw the money for other than medical purposes, then it
is both taxable and subject to a penalty.
A few states still do not offer a deduction for money deposited into
your HSA. California is one of these. So not only are
personal contributions taxed, but contributions through an employer
cafeteria plan and employer contributions are taxed. Additionally, the
income earned in the account is taxed in California. Caution: The federal
law allows certain one-time roll-overs from IRAs into an HSA but California
taxes the distribution and includes a penalty.
Note that in effect this increases the amount that can be saved tax-defered
(for federal) toward retirement. This is simply an additional IRA that anyone
may have, regardless of income levels. Once retired, this fund is
used for medical expenses, leaving other reserved for more desirable ventures.
If you want more information, probably the best source is this
HSA section on the US Department of Treasury web site.