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Health Savings Accounts Explained:

What is a Health Savings Account?

A health savings account, or HSA is a new way to pay for medical procedures. In January of 2004, Congress passed a law to allow Americans to use HSA accounts tax-free to pay for procedures, and save for retirement. You can invest this money and let it accrue interest, tax-free, for as long as you have your account.

The ability to invest money, tax-free and use the proceeds to pay for medical procedures or Health Savings Account health insurance plans makes this new option very attractive. HSA plans typically have higher deductibles, but lower premiums, which can come in handy.

As long as you withdraw money from your HSA account for qualified medical expenses, there is no penalty. A qualified medical expense is defined as: health insurance payments, co-payments or premiums, long term care costs, dental costs, vision costs, prescriptions and over-the-counter medicine as well as psychiatric care.

As mentioned above, eligible insurance plans for HSA often require higher deductibles. In order for an insurance plan to be eligible, you must have at least a $1000 deductible for individuals and a $2000 deductible for families.

Each year you are allowed to contribute less than $2650 or the amount of your deductible, whichever is the lesser for individual plans. Family plan limits are the lessor of $5250 or your annual deductible.

You will have four choices for your type of HSA plan: (1) Money Market Account, (2) CD type account, (3) Interest bearing account or (4) Mutual funds account.

Funds that are contributed to an HSA savings plan are held in trust and administrated by an approved trustee, usually a bank or insurance company. You can select one of four investment options, as mentioned above, and decide how much risk you want to take with your funds.

Typically, you will receive a checkbook or debit card from your HSA administrator. Whenever you need to pay for medical expenses, you can use either one to make your payment. You are not required to get authorization for these purcHSAes.

HSA deductions are "above the line" so if you plan to itemize your deductions, you will not be able to deduct your contributions. However, if you do not itemize, you will receive a statement at the end of the year which will show how much you contributed to your plan. This amount can then be deducted if it is less or equal to your maximum contribution limit.

This will depend on the administrator of your HSA. You may be required to pay a sign-up fee, a monthly fee or a fee on checks or transactions for withdrawals from your HSA account.

If you are under 65, a United States resident and have an HSA eligible health insurance plan, you can apply online for your own HSA account today.