Health Savings Accounts - How They Work

The idea of health savings accounts came about just before 2003, when they were adopted into law. They provide a great way to lower medical costs, insurance premiums, and save you money on your taxes. Here's how they work:

There are two parts to the health savings account idea. The first is the health plan.

Part 1. The Health Plan
You must have a "qualified" high deductible health plan (QHDHP) to be able to use an HSA. Qualified, meaning by the Internal Revenue Service. The idea is to take on most of your expenses by paying them out of your own pocket, until you reach your deductible. Deductible options usually range from $1,500 to $5,000 for an individual and $3,000 to $10,000 per family.
The plans are allowed to cover preventive care and accidents before the deductible, to certain amount. Otherwise most everything is covered after you completely meet your deductible. Many high deductible health plans have 100% coverage after you meet your deductible, but some don't. The best thing about qualified high deductible health plans is that the premiums are substantially lower than normal "full benefit" plans.

Part 2. The Health Savings Account
Once you have the health plan in place, you can open up a health savings account. Most banks and credit unions offer them to their customers. It's also usually an option to us your insurance company's preferred HSA providers. I personally think it's nice to be able to walk into my normal branch around the corner to make deposits, withdrawals, and order cards etc...

Deposits
You can deposit a certain amount in to your HSA each year. The limits change each year, so visit the IRS website to find out what the current limits are. Once you have your account open and your health plan in place, you can either leave the balance at $0 and deposit money when you need it, or you can deposit money and start building a balance so it's there and ready if you have a medical expenses. When you deposit money into your HSA, it goes in pre-tax and when you use it to pay for medical expenses, it comes out tax free. It's the only tax advantaged account with those features. (Normally with IRA's etc you get taxed on the way in, or on the way out. With HSA's the money is tax free going in, and coming out).

If You Have a Balance at Age 65
You can pay income taxes on withdrawals to supplement your retirement income. You can also use it tax free to pay for long term care insurance premiums, Medicare premiums, and you can still use it to continue to pay for your regular medical expenses, such as office visits, prescriptions, and surgeries etc...
The combination of qualified high deductible health plans and health savings accounts provide an excellent vehicle to help you save money on your health insurance and not pay taxes on your medical expenses.
To learn more about HSA's visit my While you're there, make sure you claim your free copy of my eBook titled "Seven Money-Saving Health Insurance Tips."

Or get started now and find out how much a Health Savings Account and High Deductible Health Plan could save you by If you found this article helpful, I would appreciate your help in rating it using the five star rating system below. Thank you and good luck in your search for an affordable health plan!