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How Do Health Savings Accounts Work?

The problem: Health care costs are out of control.

If you�re self employed or a small business owner, a new health savings account may be just what the doctor ordered to get your health care costs under control.

What is a health savings account plan?

 

An HSA is a special tax-sheltered savings account for medical bills.  It is similar to an IRA.  Instead of buying high-priced insurance with low co-pays, you buy a low cost policy (with a "high" deductible) for the "big" bills and save the difference--in the HSA--to cover "small bills".  Money deposited into the account is 100% tax deductible and can be easily accessed by check or debit card to pay medical bills tax-free (even stuff not covered by insurance like dental and vision).  What you don't use for medical bills is yours to keep--it stays in your account and keeps growing on a tax-favored basis to a) cover future medical bills; or b) supplement retirement, just like an IRA.  In sum, the HSA offers 1) lower premiums; 2) lower taxes; 3) freedom of choice; and 4) more cash at retirement.

 

Establishing an HSA plan is as easy as 1-2-3...

 

1. Take out a "high deductible" HSA-Qualified health insurance policy. Your monthly premiums will be low because of the nature of the policy. (Depending on your tax status, your insurance premiums may be tax deductible. Health insurance premiums paid by the self-employed are 100% deductible beginning in 2003.) CAUTION: Not just any policy with a so-called "high deductible" will qualify you for the HSA plan-it must be a policy that meets the specific HSA design specified by Congress.

Our agency offers the HSA-Qualified policy in several states (see above). We recommend only top-rated insurers with long-standing reputations in the marketplace. Click here to learn more about the policy design.

 

2. After the HSA-Qualified insurance policy is issued and in-force, then establish the actual HSA savings account at a qualified financial institution. Under the HSA law, you have a wide variety of investment options in addition to fixed accounts, including mutual funds, stocks and bonds. You are always free to maintain the account at any financial institution that is a bona fide HSA custodian registered with the IRS. Currently, few institutions offer HSA accounts and most that do offer the accounts tend to charge rather high fees (example: a brokerage firm may charge a $100 annual service fee).

Our agency will recommend a qualified HSA administrator if you do not already have one.

Begin funding the savings account. There is no minimum contribution required; however, just like an IRA, there is an annual maximum. Be sure not to contribute more than the maximum amount allowable each year. Click here to learn more about the current HSA guidelines (as established by Congress).

 

Etcetera...

- When you file your taxes each year, all of the money you have deposited into your own HSA will be tax-deductible on line 25, front page, of your 1040 form (assuming you have qualifying income as a self-employed person or you are participating as an employee at a company with under 50 employees). This will cut your tax bill by an average of $1,200 for a family (and about $500 for a single). It is absolutely correct to say that with an HSA, you are paying medical bills with money you would otherwise have paid in taxes! How cool is that? (see examples below-you also save money on the actual bill in most cases)

- When you visit a physician, you pay with tax-free money from your savings account. The account is easily accessible by debit card or check. If your provider is a member of the PPO discount network you have joined (with your HSA insurance policy), your bill will actually be reduced before you have to pay it. (Example: $60 Dr. visit reduced to $42. You pay the $42 with tax-free money from your HSA.)

- When you need to purchase prescriptions, simply visit a participating PPO discount pharmacy (most all major chains participate) and pay your discounted amount on the spot either by debit card or check directly from your HSA account (again, with tax-free money).

- Some medical expenses not covered by the insurance policy may still be considered allowable expenses under the HSA. For example, dental work, including braces, vision care, including glasses, eye surgery, alternative therapies such as acupuncture, etc. can all be paid for with tax-free money from the HSA.

- Keep funding the HSA every year to the maximum amount allowable by year (now up to 100% of the deductible amount with the new HSA). This will reduce your taxes each year plus, more importantly, will give you a larger and larger cushion against unexpected "catastrophic" type claims in the future. After only two or three years of good health and steady funding of the HSA, there should be more than enough in the savings account to cover any foreseeable medical expenses without ever having to dip into your pockets. (Note: dipping into your HSA savings account is not the same as dipping into your pockets-your HSA is the functional equivalent of "insurance" coverage for the small bills-what you don�t have to use is yours to keep-which is dramatically different than paying an insurance company a few thousand dollars a year to do virtually the same thing...insure the "small" bills)

- Remember, what you don�t use for medical bills from the HSA is yours to keep-just like an IRA. The balance continues to grow and grow on a tax-sheltered basis. Once you reach age 65, the account can basically be used just like a traditional IRA (withdrawals subject only to income tax-reporting-no "premature withdrawal penalties").

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