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hsa plan
affordable family health insurance

How to Set Up and Use an HSA Plan

1. Apply for a plan that complies with the Internal Revenue Code's authorization for opening a health savings account, i.e., "HSA- qualified". The plan will usually be labeled as such by the insurance company. It can be an individual, family, or employer plan. The bill, and the statute, were introduced and enacted in year 2003, effective January 1, 2004.

After approval and issuance of the appropriate health insurance coverage, open a health savings account with a bank or other financial institution that has set up health savings accounts to comply with the Code. It is not mandatory to open the account, but if you want to pay for expenses out of the account, the account should be established before the expense is incurred.

After insurance coverage is issued, the insurance company will usually send information on at least one such institution that has health savings accounts, but you can set up the account with any alternative institution. Any accumulated savings will compound tax-free.

3. Take a tax deduction by deducting your contributions to the health savings account from your taxable income on your Federal tax return. There is no minimum annual contribution necessary unless the financial institution has one as a condition of opening the account. The maximum annual contribution is determined by law in the Internal Revenue Code (see HSA Rules on subsequent page).

4. Pay for qualifying medical, dental, vision, long term care insurance premiums, and other health related expenses out of the account, using a check or debit card provided by the financial institution. Premiums for the qualifying health insurance cannot be paid for out of the health savings account.

Qualified expenses are defined under Section 512 of the Internal Revenue Code and are generally those that qualify under section 213 (d) for the schedule A itemized medical and dental deduction. There is an explanation in I.R.S Pub. 502. Here is an easier to read summary of qualified expenses

5. Qualified payments out of the account are never taxed.

6. If enrollment in Medicare is not made at age 65, contributions could continue to be made until the month of enrollment in Medicare. When you turn 65 years of age, you can take the remaining funds out of the health savings account to use as you wish, or funds can be left in the account indefinitely.

HSA coverage

You may want to leave the money in the account because qualified expenses can continue to be paid tax-free out of the remaining funds. If you make this the last retirement money you use, maybe taxes will never have to be paid on the contributions you make.

At any time, taxes have to be paid when funds are withdrawn for non-qualified expenses. Before age 65, there is a penalty to be paid in addition to the taxes if HSA funds are used for non-qualified reasons.

Reasons to have a Qualifying Plan

Lower cost coverage: Health insurance with a higher deductible costs less than a lower deductible plan. Coverage with no doctor visit or prescription copays costs less than a plan with doctor visit and prescription copays. HSA-qualified plans are designed to have higher than average deductibles and, except for some preventive care, do not have copays.

Contributions are tax deductible and compound tax-free. The account may be used to act like a retirement plan, but does not affect other retirement vehicles such as IRA, SEP, 401(k), etc. Over a period of years, the balance in the health savings account from tax deductible contributions may far exceed the deductible, and coinsurance if any, of the HSA health plan.

However, if you prefer to wait until there are qualified expenses to be paid, and then make them tax deductible, the account may be opened only when there is an expense and maintained with little or no balance, depending on the rules of the financial institution where the account is opened. A deposit could then be made only to pay for a particular expense up to the out-of-pocket amount of the insurance plan.

Further information:  HSA Rules  HSA Summary  HSA or no HSA?  HSA Banks  HSA Simplified

HSA account

HSA-qualified Quotes (select 'HSA' under 'Plan Type' in the quote results)