Health Savings Accounts Information - Iowa State Extension

The cost of health insurance has been increasing at an alarming rate over the last few years. To cope with these burdensome premiums, families have switched to health plans with higher deductibles and co-pays. This creates a situation, when a health event occurs; savings accounts (or loans) need to be tapped-into to cover these out of-pocket-expenses.

With the passage of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, Health Savings Accounts (HSA’s) can be used to provide tax-favored treatment of these current medical expenses and the opportunity to save on a tax-privileged basis for future medical expenses.

HSA’s allow individuals to save for medical expenses in portable, tax-free, interest bearing accounts. Also these contributions are deductible for income tax purposes.

A family, regardless of income, may establish an HSA and deduct an amount equal to the annual deductible on their heath insurance plan. The contributions to this account that can be used to reduce gross income cannot exceed $2250 for an individual and $4500 for a family.

It is necessary for the health plan to be a high-deductible plan, a minimum of $1000 for an individual or $2000 for a family (annually adjusted for inflation). The maximum out-of-pocket expense limit in the health plan can be no more than $5000 for an individual and $10,000 for a family. Separate supplemental plans (e.g. prescription drug plan) would disqualify a HSA plan.

The rule requires that the HSA must be set up as a trust with a bank, insurance company, or other qualified agency. It cannot be commingled with other funds or used to buy life insurance. Funds in the plan can be used for qualified medical expenses---expenses for diagnosing, care mitigation, treatment, or prevention of disease, qualified long-term care expenses and prescription drugs. After retirement age, funds can be used for Medicare supplement policies. Some other policies (long-term care) may also qualify.

Finding a trust account administrator may be difficult locally. A few area banks are ready with forms and accounts. The process is simple since an individual is really just opening another checking account and responsible for managing it. The institution is not responsible for how the funds are used. On-line account services are also available with HSA checking accounts and debit cards. For example, www.msaver.com and www.hsabank.com offer a full line of services and an excellent explanation of the federal law and how HSA’s can be used.

Any funds not used in a given year can be carried forward for future needs. This fund has no maximum limit and the funds can be used at any time for other purposes. If at some point, distributions are made for non-qualifying needs, these amounts are added to the gross income for that year plus a 10% surcharge (subject to special exemptions). It is important to examine the details of the HSA laws with professionals in this field.

As an insurance agent was quoted saying, “There is a tax saving opportunity for many out there, but of course it depends on the tax bracket you are in. But if you’re making $50,000 a year and you put $4000 in an HSA you only report $46,000 to the federal government- not bad and then you get to use that tax-free to pay your bills, better yet.”