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Is HSA health insurance a good option for me?

young family seeks HSA health insuranceAccording to recent statistics, more than 11 million Americans have chosen HSA or Health Savings Account type programs to help meet their individual and family health insurance needs. There are many benefits associated with these programs but consumers should shop carefully and weigh the advantages and disadvantages of each type of insurance program before making a final selection.

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What are HSA plans?

An HSA (health savings account) or MSA, (medical savings account) are two different variations of tax advantage savings programs established by Congress in 2003 and administered by the Internal Revenue Service. MSA programs include Archer MSAs and Medicare Advantage MSAs.

Much like the older FSA’s (flexible spending accounts) and HRAs (health reimbursement arrangements, the principle benefit of HSA programs are the income tax advantages. HSA account holders may deduct their contributions from gross income. As with Flex accounts, employer contributions may be also excluded from the enrollee’s taxable income.

This program was designed for individuals with high deductible plans and provides for the establishment of a tax free savings account which can only be used to cover the insured’s out-of-pocket payments for medical expenses.

How much money can I save in these accounts?

The minimum annual deductible guidelines, established by IRS for high deductible health plans for 2011, are $1200 for singles and $2400 for families. The maximum amounts for deductibles and additional out-of-pocket medical expenses for 2011 range from $5950 for singles and up to $11,900 for families.

These are the “catastrophic” limits and the most money a policyholder can expect to pay out-of-pocket for medical expenses, under federal guidelines.

Are there other advantages to an HSA?

Yes! Monies that aren’t used remain in your account and are carried forward. Interest and other earnings on funds in your HSA account are tax-free. Distributions from these accounts are also tax-free if used to pay for qualified medical expenses. In addition, an HSA account is “portable,” staying with you if you leave your employer or cease working.

Is everyone with a high deductible medical insurance policy eligible for an HSA?

No! Those individuals covered by Medicare and those who are claimed as dependents on another’s tax return, are not eligible for the standard HSA programs. Additionally, an enrollee may not have another insurance policy, which could cover these deductible expenses.

However, Medicare recipients have their own program called a Medicare Advantage MSA, a version of the Archer MSA plan. This plan allows for contributions to a special Archer MSA account by Medicare. As with other programs, distributions from MSA accounts are tax-free or tax-deferred.

How do I open a HSA account?

HSA accounts, by law, are trust accounts, which must be administered in a specific manner as outlined in IRS regulations. The most common sources of these custodial type accounts are federally chartered banks, savings and loans, and credit unions. HSA accounts operate much in the same way as traditional IRA accounts.

For specific rules and account guidelines, see IRS Publication 969.

How much can I contribute?

Statutory contribution limits for 2011 are $3050 for an individual and $6100 for a family. Contributions can be made up until the filing deadline for your Federal Income Tax Return, which is usually April 15.

Additional, “catch up” amounts for taxpayers over the age of 55 are allowed up to $1000 for 2011. Contributions can be made by you, your employer, or any other person.

Withdrawals from HSA accounts are tax-free if used to pay for allowable medical expenses. As of January 1, 2011, withdrawals for over-the-counter drug purchases are only allowed if by prescription.

Like IRA accounts, if withdrawals are made from HSA accounts for non-medical purposes, they will be taxed and subject to a stiff penalty, 20%. For seniors over 65 and the disabled, the withdrawal penalties are waived, but the funds withdrawn will still be subject to Federal and local income taxes.

What are some other benefits of HSA accounts?

Employers may offer payroll deduction options to make funding your HSA account easier.

Unlike flexible spending accounts there is no “use it or lose it” regulation. Funds that aren’t used remain in the account from year to year, earning tax-free interest!

Like IRA accounts, most banks allow funds to be invested in select mutual funds or other interest or income bearing vehicles. Certain account minimum balances may apply.

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