HSAs and High Deductible Health Plan
Health Savings Accounts (HSAs) are a popular option of a Consumer-Driven Health Plan. Created by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, an HSA is a tax-advantaged savings account that can be used for qualified health expenses.
HSAs are paired with a High Deductible Health Plan (HDHP) - which means the main difference, financially, is that you have to pay a higher deductible in exchange for lower monthly premiums. The fact that you can use the premium savings to fund the HSA is one reason why the high deductible isn't a deterrent to choosing an HDHP. Another reason is that the tax-advantages come in three waves:
- Savings can grow tax-deferred
- Deposits are deductible off federal gross income
- Qualified medical distributions are never taxed
The Rundown of How to Use Your HSA
- Enroll in a qualified High-Deductible Health Plan (must have deductible amounts that reflect the limits set by the IRS)
- Once you've enrolled in a qualified HDHP, the next step is to search for an HSA at a qualified financial institution, like a bank or credit union.
- Fees to Consider - set-up, transaction, maintenance, account closing
- Disqualifications - coverage from another (non-HSA-eligible) plan, enrollment in Medicare, or claimed as a dependent on someone else's tax return
- Elect your pre-tax HSA contributions (which can be made via regular payroll deductions).
- Find out if your employer will match contributions
- Stay within the IRS-defined limits to remain tax-free
- Use the HSA to pay for qualified medical care. You will be paying all of the expense until the plan deductible is met.
- Shop around for cheaper services and ask for generic prescriptions
- Remember that In-network preventive care (annual physical, immunizations, etc) is typically covered and not included in your expenses
- Research investment options to further grow the funds in the account.
For a more in-depth look into HSA's, view our "The Best Introduction to Health Savings Accounts" guide.