Taking Charge of Your Health
Is a Health Savings Account (HSA)
By Paula L. Wilson
Health Savings Accounts (HSAs) were launched into the health insurance market three years ago in an attempt to bring consumers into a more active role in their health care spending.
The movement toward "consumer-directed health care" was already in motion with the existing Medical Savings Accounts (MSAs) and Health Reimbursement Arrangements (HRAs). More than 3 million Americans have joined the consumer-directed health care movement by participating in HSAs, and the number continues to rise at an even faster pace.
Just before the 109th Congress completed its final session last year, the Tax Relief and Health Care Act of 2006 passed the House and Senate. President Bush signed the legislation into law on Dec. 20, 2006. The improvements in HSAs included in the act will attract even more people to join the movement, as roadblocks have been removed that kept many from diving in.
Exactly What Is a Health Savings Account (HSA)?
Health Savings Accounts became law as part of President Bush's Medicare Prescription Drug, Improvement and Modernization Act of 2003. The purpose of HSAs is twofold: first, to promote savings for future health care expenses; and second, to gently nudge the insured public into consumer-driven health products by offering tax incentive programs to those enrolled in qualified plans.
Why would a tax proposal tied to health insurance be included in a Medicare Reform package? By the time the Medicare rolls consist primarily of baby boomers, two things are certain: 1) Medicare will be in serious financial trouble; and 2) The cost of heath care will have grown to a level we can only now imagine. HSAs are designed to give a new generation of consumers more personal responsibility for their health through high-deductible health plans and tax-advantaged savings plans aimed at saving for future health care costs.
An HSA is a tax-advantaged savings account created by an individual who is covered under a high-deductible health plan. HSAs have limits on how much you may deposit, as well as what constitutes a qualified withdrawal. The tax advantages of HSAs are what set them apart from other tax-advantaged programs. Not only is the money deposited into the account tax-deductible, but the interest earned and any qualified withdrawals also are all tax-free.
With an HSA, you deposit money in the tax-advantaged savings account and use it for all of your medical expenses until you meet the deductible for a calendar year. After that, you are covered under the terms of the high-deductible health plan. The beauty of an HSA is that, unlike a standard health insurance plan in which your premiums are lost forever, with an HSA, the money goes into a savings account. For example, if you put $3,000 into the HSA in 2007, and don't have to make any trips to your health care provider, that $3,000 stays in the account, earning interest. You can then use it to help meet your deductible in 2008.