What You Need To Know About Health Savings Accounts

Is Investing in a Health Savings Account Right For You?

by Wes Markham

Health care and insurance plans are very intricate and are updated and changed frequently, leaving many people confused or overwhelmed. A common point of confusion is the Medicare Prescription Drug, Improvement, and Modernization Act. This bill, signed into law in 2003, introduced a new way of paying for medical expenses, called Health Savings Accounts.

What is a Health Savings Account?

Health Savings Accounts are devoted solely to health expenses and are offered to taxpayers who are enrolled in High Deductible Health Plans. Health Savings Accounts offer an incentive for taxpayers to buy insurance plans with high deductibles by giving more flexibility and control to the owner. Health Savings Accounts differ from other medical savings accounts in that the funds are owned by the individual, are not tax deductible, and roll over each year to accumulate if not spent.

How Health Savings Accounts Work

Policy owners or employers may deposit money into the account, up to a certain amount each year. The limits are different for single payers and families, with the limit being raised every several years. A policy holder may withdraw funds from the account, without taxation, to pay for qualifying medical expenses or medicine. If you withdraw funds for non-medical uses, the money is subject to standard tax fees. The Patience Protection and Affordable Health Care Act stipulates that policy owners may not purchase over the counter drugs with a Health Savings Account without a doctor’s prescription. Qualifying medical expenses are determined by the health care provider and must be documented in annual tax reports to the Internal Revenue Service.

Stipulations and Limitations

To get a Health Savings Account you must be under 64 years old and cannot be a dependent on another person’s tax return. Before purchasing the necessary High Deductible Health Insurance, you may not hold any other types of health insurance, except: specific injury, disability, long term, dental, and vision.

Advantages

In addition to tax yearly roll over status, Health Savings Account money can be moved when a policy holder changes jobs without penalty. The unspent money not only is tax exempt, but acquires interest year and after year. Once a policy holder reaches the age of 64, they can withdraw the funds, for any reason, without taxation.

Disadvantages

One of the main disadvantages to a Health Savings Account is that it requires purchasing a High Deductible Health Plan, which, in addition to the high deductible, comes with numerous limitations and stipulations regarding qualifying conditions and expenditures. The high cost of these plans also limits the number of people who can participate in them, leaving a large number of families unable to access high-end medical care or take out loans to pay for them.

Speak with your insurance provider to find out if you are eligible for a Health Savings Account and weigh whether it is the right choice for you.