More Americans Enrolling in Health Savings Accounts

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A new census released by America’s Health Insurance Plans (AHIP) has found that ten million Americans are now using a Health Savings Account (HSA), an increase of 25% since last year. With upcoming changes likely to most insurance plans due to the health care reform law, will an HSA benefit you?

A health savings account is a tax-advantaged medical savings account available to those who are enrolled in a High Deductible Health Plan (HDHP). Tax-advantaged means that the funds that are contributed are not subject to federal income tax at the time of deposit and remain tax-free when used for qualified medical expenses. Unlike a flexible spending account (FSA), an HSA is owned by an individual and funds can accumulate and rollover each year if not spent.

The money in an HSA can be used to cover qualified medical expenses that the insurance plan does not reimburse. These include deductibles and co-pays, complementary and alternative therapies such as acupuncture or chiropractic care, certain types of cosmetic surgery, medical devices such as glucometers or hearing aids, drug addiction treatment, smoking cessation programs, and medically necessary weight loss programs.

For those who are between jobs, an HSA Savings can be used to cover insurance premium costs.

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Expenses that are not eligible for HSA funds include child care for a healthy baby, unnecessary cosmetic surgery, funeral expenses, health club dues, and nutritional supplements. Beginning in 2011, over the counter medications will no longer be considered a qualified medical expense, under Sec. 9003 of HR 3590.

One can withdraw funds for non-qualified medical expenses; however the money will be taxed at your income tax rate plus a 10% tax penalty if you are under 65 (similar to an IRA fund).

“HSA plans continue to be an important coverage option for families and small businesses across the country,” said Karen Ignagni, President and CEO of AHIP, but they are not for everyone.

To use an HSA, one must be enrolled in a high deductible health plan, meaning that you will pay less for monthly premiums, but medical expenses will be out of pocket until a deductible is met. This is not usually the best plan for those who need frequent office visits, such as for chronic disease management. Minimum annual deductibles are $1200 for self-only coverage and $2400 for family coverage.

To find out of an HDHP and HSA are good options for you, first calculate recent years medical spending, including the amount spent on premiums, co-pays, and out-of-pocket medical expenses. Compare that to the amount that you would expect to pay with a high-deductible plan to see if that would save money over the course of a year.

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