HSA FAQ - Frequently Asked Questions about HSA Plans
What is an HSA?
A Health Savings Account ("HSA") is a special tax-sheltered
savings account that is similar to a traditional IRA, only for medical
expenses. It's been called a "Medical IRA" and a "Super
How does it work?
The way it works is simple. The savings account (HSA) works in conjunction with
a special "high-deductible" health insurance policy to give you
comprehensive health insurance coverage at the lowest possible net cost. All
the money you deposit into the HSA is 100% tax-deductible, which makes those
dollars "tax-free." The insurance company pays the "big"
bills (covered expenses in excess of the deductible amount) and you pay the
"small" bills with tax-free money from the HSA. You can even use
these tax-free dollars to pay for medical expenses not covered under the
insurance policy, such as dental, vision and alternative medicines. What you
don't need to use every year for the "small" bills is yours to
keep...and accumulate toward your own retirement...just like an IRA!
What is required in order to open an HSA?
In order to open and make tax-deductible contributions to an HSA, you must first
be insured under a qualified high deductible major medical insurance policy
("QHDHIP"). Because this is a tax-qualified program, Congress sets
the rules, including the range of deductibles from which you can choose. The deductible under a family plan can be one
deductible per family per calendar year, or "per person" up to the prescribed maximum.
See links on the right for current HSA guidelines regarding deductible size and out-of-pocket maximums.
Once the qualifying high deductible health insurance policy is issued and in
effect, you are then eligible to establish and make contributions to your own
HSA savings account. The account must be established and maintained by a bona
fide HSA custodian, which simply means a financial institution that has been
approved by the IRS as an HSA administrator. Although virtually every bank and investment firm is eligible with the IRS, relatively few of these firms offer the accounts, due to a somewhat limited market and relatively high expenses resulting from reporting requirements mandated by the IRS.
Can I choose my own doctor?
Yes! An HSA is the antithesis of an HMO. With an HSA, you are free to use
any doctor and any hospital you choose. Under pricing schemes employed by most
insurance companies that offer the HSA-qualified plans, significant
savings are available to you for choosing to participate in a PPO (preferred
provider) network. The available networks offer a wide variety of physicians
and service providers at discounted rates.
(Please note: It is
easy to confuse "HMO's" with "PPO's." We believe that
joining a PPO network is a good thing! If you are not that familiar with the
benefits of PPO membership, any one of our professional representatives will be
delighted to spend the time necessary to assist you in understanding the
advantages and disadvantages of all network options.)
What happens if my medical expenses exceed
the amount of my deductible?
If your covered medical expenses for the year reach the deductible of your HSA
major medical insurance policy, the policy will take over and pay the balance
of the qualified expenses at 100% (up to a lifetime maximum of $2 million or more, per
person, depending on coverage selected). In other words, you are fully insured for covered medical expenses
over the amount of your HSA policy deductible, while self-insuring the small
bills below the deductible with tax-free dollars.
CAVEAT: Not all HSA-qualified policies cover the same expenses, should they be incurred! A professional insurance broker should be solicited to avoid unhappy experiences from purchasing the wrong policy type. Many internet insurance sites do not employ licensed agents, so the level of professional assistance can vary wildly from site to site, or be non-existent.
What if my medical expenses do not reach
my deductible? What happens to the money in my savings account that I don't
need to spend on medical blls?
The money in your HSA is all yours! The less money you spend on medical
expenses, the more will remain in your HSA, and, again, that money is always yours. It
will earn bank interest or better while in the custodial account, and depending
on the HSA administrator you choose, you can invest all or
some of it in any IRS approved securities you may prefer, including mutual
funds, stocks and bonds.
The odds are very much in your favor that you will not meet
your deductible every year! In fact, according to AMA statistics, the odds of
the average adult American being hospitalized in any given year are about 1 in
12. So, as time goes on and you fully fund your HSA account annually, about the
*worst* thing that can happen is that your tax-sheltered savings account just
keeps growing and growing. Before you know it, you'll have more
money accumulated in your HSA than you've paid in premiums-at which point, you have a "negative cost" health care plan!
Does that mean I can contribute to my HSA
every year, even if I didn't meet my deductible in the previous year?
Absolutely! Remember, an HSA is, for all practical purposes, just like an
IRA--you're allowed to contribute to the account every year in which you are
otherwise eligible to participate--and fully deduct your contributions 100%
What are the co-pays for Dr. visits and
By law, co-pays are not allowed in an HSA-qualified policy . The concept is for you to "self-insure" the small bills with tax-free dollars
from your HSA. When you think about it, your HSA is really like an insurance
company that is just responsible for the "little" bills--those under
your deductible amount. Quite literally, that insurance company pays 100%
of the Dr. visits and prescriptions with no co-pays--it's actually *better*
than paying $30, $40 or more in co-pays with a higher priced co-pay plan. Plus,
best of all, you get to keep the profits from that insurance company every year
instead of some big ole' insurance company! And...and...you get a nice
tax-break for funding that insurance company--even if you don't incur any
medical expenses for the year! Of course, you are assuming some risk, but that
risk is "capped" at your deductible amount, subject to the limits and parameters of your policy!
What about taxes on the money in the
account not used for medical expenses?
All dollars you deposit in the account are 100% tax-free while they remain
in the account. Earnings you generate on those dollars are also free from taxes while
in the account. (Incidentally, you select your own investment vehicle. You can
invest in a "safe" fixed account, stocks, bonds, or mutual funds.) At
age 65, you may retain the balance in your account to be used for future
medical expenses, in which case you will never pay the taxes on the interest or
the principal, or you can start using your HSA like an IRA--it's always your
money, your choice.
The only time income tax is ever paid on principal or interest from the HSA is if
the money is withdrawn for non-medical expenses. There is also a penalty
for withdrawing funds for non-medical expenses prior to age 65 (considered a
"premature withdrawal" unless an exception applies, such as disability).
Upon reaching age 65, you will only be liable for taxes on the money you
withdraw that is not used for medical expenses, with no penalty for
"early" withdrawal--since, by definition, a withdrawal can only be
"early" under the HSA law prior to age 65. This also means you can
withdraw funds to pay for medical expenses at any time after turning age 65 and
never pay taxes on those dollars! (After all, medicare doesn't cover
What if I die before using up all the
funds in my HSA?
Just like an IRA, the HSA is an inheritable account.
Is there a limit on how much I can
contribute to my HSA and write off on my taxes each year?
Of course! After all, this is a special tax-favored account--our friends in
Washington are not going to let you write-off unlimited amounts under this
Please see links on the top right side of this page for up to date information on maximum contributions.
Will this amount increase in the future?
Yes. The maximum amount increases based on an inflation-indexed amount determined each year by the IRS.
Can I have an HSA in addition to an IRA or
other qualified retirement plan?
Yes! Although an HSA operates under many of the same rules that apply to
traditional IRAs, it is not an IRA. In other words, an HSA is not a
"retirement" plan--it is a "savings account" plan for
medical expenses. Plus, unlike an IRA, there are no special income
Will I still be able to deduct the
premiums I pay for the HSA qualified insurance policy?
Premiums for the underlying HSA qualified high deductible health
insurance policy are deductible to the same extent as premiums for any non-HSA
qualified insurance policy, including traditional HMO and PPO plans (this
applies equally to group plans as well as individual plans for the
self-employed). The main difference, of course, is that the actual amount of
the deduction will be smaller because the premiums will be smaller (usually).
In other words, the HSA doesn't take away any tax-deduction you currently have
(for premiums); it gives you a whole new deduction--for saving your own
money--and a 100% deduction at that! (Unless you are self-employed or a small business owner, premiums are probably not tax-deductible under current tax law, although Congress continues to consider extending a deduction to individuals for premiums paid on an HSA-qualified policy.)
Does this mean that Uncle Sam is really
"paying" me to save money for medical expenses?
Yes! That's exactly what an HSA does--the government is essentially
"paying" you to save money for medical bills by allowing you to
deduct 100% of your HSA contributions! When you think about it, the HSA is a
spiffy way to by-pass the 7.5% AGI limit for deducting medical expenses. (Ordinarily,
medical expenses are only deductible when you itemize on Schedule A, and then
only when medical expenses exceed 7.5% of your Adjusted Gross Income.)
Actually, it's even better than that because the HSA allows you to deduct money
you're saving to cover future medical expenses--expenses that may, in fact,
Is it fair to say that the Government
subsidizes my routine medical bills with an HSA?
Yes, because that's the reality of paying for your routine medical bills
with tax-free dollars! Let's use a typical family scenario as an example. If
your family contributes $5,800 to your health savings account, this entire amount is 100% deductible on line 25 of your
1040 Form (regardless of whether you itemize). So what is the real impact of
a $5,800 tax write-off? For most families, it is worth about $1,600 a
year in tax savings (assuming a 28% marginal tax bracket). That
is $1,600 you otherwise would have sent to the Government in taxes! Now, it's
yours to keep. It is important to recognize that without the HSA, you
would have sent this $1,600 off to Uncle Sam, never to see it, or any interest
off of it in the future. So now, when you have a routine medical bill, just
remember that the first $1,600 coming out of your HSA each year is really money
that the Government was entitled to--until you took the initiative to establish
an HSA plan.
(If you really want to be the envy of your friends--and enemies--tell 'em
that you've got a special health plan set up whereby the Government subsidizes
your routine medical and dental bills!)
Who can have an HSA?
Virtually anyone who has enough taxable income and meets the following requirements:
The covered individual must be:
by an HSA qualified high deductible major medical insurance policy; and
covered under "other health insurance"; and
have net income at least equal to the annual contribution (in order to be able to deduct the contribution).
Exceptions: "Other health insurance" does not include coverage
for: dental care, disability, supplemental health care plans, long-term care,
vision care, medicare supplements, and worker's compensation. (These are
insurance plans you are permitted to carry in addition to an HSA qualified
plan. Our agency offers a complete portfolio of such plans, including
supplemental accident coverage and supplemental cancer coverage.)
Can my HSA be used to pay premiums?
No, this would be a non-medical withdrawal subject to taxes and penalty.
Exception: No penalty will apply if the money is withdrawn to pay premiums
Qualified long-term care insurance; or health insurance, including a qualified
major medical plan, while: a) you are receiving unemployment compensation or b)
you are entitled to health care continuation programs, such as COBRA. Additionally, health savings account dollars can now be used to pay for Medicare premiums. This is a great idea and one that few people have capitalized on. Save for years, then use money on a tax-free basis to pay Medicare premiums! Smart planning!
Why can't I just do the same thing with my
own health insurance plan in combination with an IRA?
Typically, this question is asking why a person can't take out the health
insurance policy of their choice and fund an IRA instead of an HSA. The only
way we know how to answer this question is straight-up. First, Congress wrote
the rules--we didn't. At this time, Congress allows only a certain type of qualified
health insurance plan to work in conjunction with an HSA account.
to funding an IRA instead of an HSA, again, our answer is straightforward: If
you are not fully funding an IRA, you may not be a good candidate for an HSA.
(In general, a good candidate for an HSA is a person who pays taxes, wants to
pay less taxes legally and is probably maxing out any and all available
retirement programs available to him or her. Of course, ultimately, the ability
to withdraw dollars tax-free to pay for medical bills is an option available
only with an HSA, not with an IRA.)
What's the biggest benefit of an HSA?
(Or--"Would Einstein approve?")
That's easy--it's the opportunity to offset the amount of premiums paid over
time with tax-free dollars growing with compounded interest on a tax-free
basis--that's the "real genius" of an HSA. As you may know, Einstein
referred to the "magic" of compound interest as one of the wonders of
the world. Who knows what terminology he would have used to describe compound
interest on a tax-free basis?!? Who are we to argue with Einstein?
(It's amazing how many people carry $30 co-pays on their health plans yet
carry $1000 deductibles on their car insurance and $2,500 to $5,000
deductibles on their homeowners insurance. These folks wouldn't dream of buying
insurance to cover a flat tire or a broken door knob, yet, the risk of having
to use the health insurance for a major claim is actually less than having a
car accident or having a house burn!)
Why doesn't it make more sense to pay
higher health insurance premiums to have smaller deductibles and co-pays for
Dr. visits and prescriptions?
Stop and think about what's really being "bought" with high priced
health insurance premiums today. Simply stated, there is NO WAY to ever recoup
the amount of money you pay in premiums today for health
insurance...unless...you have a "huge" catastrophic-type claim!
To illustrate the point, assume an "average" family (both adults
in their early 40's) pays a monthly premium of $550, which is $6,600 per year.
If the family has 3 doctor's visits during the year at $100 each ($300 total)
plus 4 prescriptions at $50 each ($200 total), that's a total in medical
expenses for the year of $500. Assuming the co-pay for each doctor visit (3)
and each prescription (4) was $20, that's a total in co-pays of $140 (7 x $20).
When you subtract the total bills from the co-pays, you get a total of $360.
What this means is that this family has paid $6,600 in premiums to an insurance
company in order to pay them to do the paper shuffling and pay a mere $360 in
bills! That's rather ridiculous, don't you agree?
What it all gets back to is the age-old principle that, if you can pay for
it yourself, you don't need to buy insurance for it, and the fact of the matter
is, we can all pay for minor medical expenses out of our own pockets! Most of
us, however, are overpaying an insurance company to do the paper shuffling to
pay a very small amount of claims each year.
The only real financial exposure any of us has when it comes to our health
is the major, "catastrophic" type of medical expense claim. That's
where policies like the HSA make the most sense. These types of policies allow
you to be fully covered for the big bills, while self-insuring yourself for the
small bills (with tax-free dollars) while saving a small fortune in premiums
along the way.
What's the alternative?
HSAs ARE the alternative! (Poor grammar, but you get the point.)
In case you haven't yet noticed, health insurance premiums are officially
OUT OF CONTROL. If you stay in the same health insurance game, you are going to
pay a FORTUNE in health insurance premiums--and you'll never get ANY of that
money back! (Or, you'll end up dropping the coverage at some point in the
future, exposing your family to the risk of no coverage when it is needed
Just for fun, check out this hypothetical couple who just doesn't "get
it" and opts to continue with their "traditional" health plan.
How much will they now end up paying in premiums by age 65?
This couple is both age 43 with a couple of children. Assume their current
premium is $6,600/year. These types of plans are increasing at approximately
15% PER YEAR (actually more like 30% the past two years!! but that's just too
insane to project into the future). In just the next 10 years alone, this
family will pay a total of $133,992 in premiums!! By age 65 for this couple
(just 12 more years of paying premiums) continuing to assume annual increases
of 15%, this family will have paid a whopping total of $908,345 in premiums!!
What will their net balance be at age 65? It won't even be ZERO!! No, their net
balance will be a NEGATIVE $908,345.
Which option makes more sense, especially in the long run?
What is the biggest mistake people make
when deciding not to establish an HSA?
Probably the biggest mistake people make when deciding NOT to establish an
HSA is that they tend to treat it like just another "traditional"
health insurance plan. They will sit down and try and "compare" the
benefits and the premiums, etc. What they are missing when they do this is the real genius of the HSA--the ability to grow tax-free dollars on
a compound interest basis over an extended period of time! In other words, when
someone treats an HSA like just another traditional health insurance plan, they
are failing to look at their health insurance from a long-term
perspective--ignoring the fact that they are going to be paying health
insurance premiums until age 65!
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