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Health Savings Account Q & A

Question #1: What is an HSA?
If you haven’t heard of the new Health Savings Accounts (HSA), it is only a matter of time until you do. They are the newest health expense & tax reducing strategy in the marketplace. An HSA is a tax-sheltered, medical savings account similar to an IRA, but earmarked for medical expenses. HSAs are designed to help individuals save for qualified medical health expenses on a tax-free basis. HSA deposits are 100% tax-deductible and can be easily withdrawn by check or debit card to pay qualified medical bills with tax-free dollars. The new legislation allows people who acquire medical policies with deductibles of at least $1,250.00 for a single person or $2,500.00 for a family to establish tax-free “health savings accounts.” They, or their employers, can fund these accounts up to $3,250 per year for a single participant or $6,450 per year for a participant with one or more dependents.

Question #2: When did HSAs begin?
December 8th, 2003, after 4 long years and numerous attempts, President Bush signed into law the Health Savings Account, via the new Medicare bill, effective January 1, 2004. HSAs will change the way millions can save to meet their health care needs. “We want Americans to be able to take advantage of HSAs as soon as possible,” stated Treasury Secretary John Snow. “An HSA is a good deal, and all Americans should consider it.

Question #3: Who can create an HSA?
ALMOST EVERYONE will be eligible for the HSA. Most importantly it is good for the self employed and small business owners, which have generally been excluded from such programs. Any individual ($1,250.00 or higher) or family ($2,500.00 or higher) who is covered by a “qualified” high-deductible health plan (HDHP) may establish an HSA. Individuals over the age of 55 can make extra contributions to their accounts and still enjoy the same tax advantages. If you are eligible for Medicare you cannot participate.

Question #4: Why is an HSA good for me?
Bottom line…they help you save taxes and pay for medical expenses. Every year the money placed in an HSA that is not spent stays in the account and gains interest tax-free, just like an IRA. Deposits can be invested in a variety of investment vehicles including: savings accounts, Money Market funds, mutual funds, stocks & bonds, etc. Unused amounts remain available for later years (unlike amounts in Flexible Spending Accounts/Cafeteria Plans that are forfeited if not used by the end of the year). All money going in are pre-tax dollars and withdrawals for qualified expenses are tax-free. Money that individuals put into HSAs are not taxable and individuals can sock away up to $3,250.00 for individuals or up to $6,450.00 for families. Finally, HSAs are portable and owned by the employee. So if the employee changes jobs, the HSA goes with them. HSAs offer greater flexibility on how to spend hard-earned dollars on health care.

Question #5: How do HSA’s work?
Move from a high cost, low deductible, traditional health plan to a High Deductible Health Plan (HDHP) and contribute the premium savings into a tax-deductible HSA. The HSA can be used to help pay smaller covered medical expenses until the deductible is met; should the need arise, the high deductible insurance policy takes care of covered medical expenses exceeding the deductible. Tax-advantaged contributions can be made in three ways:

  • The individual and family members can make tax deductible contributions to the HSA even if the individual does not itemize deductions,
  • The individual’s employer can make contributions that are not taxed to either the employer or the employee, and
  • Employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan.

If you would like information on the health insurance plans required for a health savings plan, contact MillerWade. MillerWade ranks among the largest Employee Group Benefit companies in Utah, servicing over 700 companies and thousands of individuals.

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