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:

1. You carry relatively inexpensive, high-deductible health insurance
2. You open a Health Savings Account (bank, credit union, etc.)
3. You deposit what you save on insurance premiums into the HSA

Then when there is a medical expense:

1. You pay your deductible expenses out of the HSA
2. 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 2012   Individual Family Under Age 55 $3,100 $6,250 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.

Any views expressed herein are based on our best information. The content of this web site was written as general information without specific individual information and thus may not apply in all situations. This material was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

Last update: 10 November 2011
© Richard Ogg, 2000-2012

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Janelle Ogg, EA
Richard Ogg, EA