Health Savings Accounts have only been around since 2004, but they are gaining in market share with both individuals and small business owners.  In both cases, people find they can get more coverage at a lower cost from the high-deductible plans that work with a Health Savings Account (HSA). 

A Health Savings Account or an HSA is like a personal health savings account with three huge   differences.  First, no matter how you invest the balance, the earnings are not taxable as long as you let the balance grow with tax-free earnings or you withdraw money to pay for medical care that meets government criteria.  You can spend the money for your kid’s check-up at the dentist, your spouse’s medical massage therapy, or for your own acupuncture treatment.  There’s actually a long list of health-related costs that the federal government allows you to use HSA money for and any money you don’t spend on health care can keep on growing tax-free to double as a retirement account.

A second big difference between a Health Savings Account and a regular savings account is that you can get a tax deduction for your savings.  You can deposit up to $3,050 for individual plans or up to $6,150 for family plans and take a tax deduction for the entire amount even without itemizing deductions.  It doesn’t matter whether you use the funds for qualified health care or build a retirement fund with it.  The tax deduction is still available.

How Do Health Savings Accounts Work?

You can open a Health Savings Account as long as you have a qualified high-deductible health plan (HDHP).  You won’t have a deductible on recommended preventive care services, like annual exams, vaccinations, checking for high blood pressure, etc.  If you need other types of health care that aren’t covered, you can use money from your HSA to pay for it.  Experts recommend starting with a deductible you could cover until you have built up your HSA.

Health Savings Account balances carries over year after year.  You can’t lose HSA money by changing employers like you can lose flexible savings account funds that are tied to an employer.  There is one exception, though.  If you spend HSA money for something besides qualified medical care, you face a penalty fee of 20 percent on the amount you withdrew and you have to pay taxes on the withdrawal.

This year, that penalty just increased from 10 percent and there was one other change in Health Savings Accounts.  You can no longer use Health Savings Account funds to pay for OTC (over-the-counter) medications unless your doctor prescribes them.  

With an HSA, the public can make wiser choices when it comes to their health.  Health Savings Accounts can be a cost effective strategy to cut monthly premiums, turn health care costs into tax deductions and get tax-free earnings.