There are many people who believe that an HSA, or Health Savings Account, is an important reform that will increase the efficiency of the crisis-plagued United States health care system and keep health care costs from growing. HSAs are intended to be a motivation for consumers to save for health care expenses that might arise in the future and, as well, make it possible for patients to get the care they need without a middleman or physician “gatekeeper” to determine what benefits they are allowed.
HSAs are medical savings accounts that are tax-advantaged and available to U.S. taxpayers who are enrolled in a High Deductible Health Plan, or HDHP. Funds in an HSA are not subject to federal income tax at the time of deposit and can be used at any time to pay for qualified medical expenses. These funds are owned by the individual and can also roll over and if not spent can accumulate year over year, unlike flexible spending accounts, which are often a component of employer insurance, benefit packages.
Like an IRA, or Individual Retirement Account, there are tax advantages if an HSA withdrawal for non-medical expenses is taken after retirement age and penalties incurred if withdrawn earlier. HSA funds can also be invested similarly to IRA investments and can be rolled over from fund to fund. However, an HSA cannot be rolled into an IRA or into a 401(k), nor can funds from these be rolled into an HSA, with the exception of a one-time IRA transfer. Unlike some 401(k) contributions from employers, all HSA contributions are immediately owned by the policyholder, despite the source of the contribution.
HSA deposits can be made by the policyholder of the HSA plan or by their employer. Contributions from an employer can be made through the employer on a pre-tax basis. Self-employed people are required to pay self-employment tax on contributions to their HSAs. All deposits to an HSA are the property of the policyholder, no matter where or from whom the deposits came. If for whatever reason, a policyholder must stop coverage of their HSA, the funds already in the HSA will still be available for use, although the policyholder loses the eligibility to deposit further funds in future.
HSA funds are not subject to income taxation if they are used for qualified medical expenses, and policyholders are not required to obtain approval from their medical insurer in order to withdraw funds. Qualified medical expenses can include services, items or products that are covered in the policy holder’s health plan but might be subject to co-payment or cost sharing (i.e., a deductible or coinsurance). Expenses not covered under medical plans, such as vision, dental or chiropractic care can also be included, as well as related medical equipment and health aids like eyeglasses, hearing aids, and transportation support chairs. Even non-prescription and over-the-counter medications can qualify as legitimate HSA medical expenses.
