This article on Health Savings Accounts is the third installment in an educational series of articles sponsored by Innovative Employee Benefits on Normal 0 false false false EN-US X-NONE X-NONE Flexible Benefit Plans.

Health Savings Accounts are savings accounts used to pay for unreimbursed health care expenses. These accounts can accumulate tax-deferred interest similar to individual retirement accounts (IRAs). Authorized by Title III of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became available starting on January 1, 1997.  These accounts are available only to those who are self-employed or small businesses that employ less than 50 employees.

Funds are controlled and owned by the account holder. The employee or the employer–never both–makes contributions. In order to qualify, the employee must be covered by a high-deductible health insurance plan.

For 2010, the maximum annual contribution limit is $3050 for self-only and $6150 for family coverage. The minimum annual deductible under a high deductible health insurance plan is $1200 for self-only coverage and $2400 for family coverage.  The annual out-of-pocket expenses  for a high deductible health insurance plan cannot exceed $5950 for self-only and $11,900 for family coverage.

Savings are rolled over every year and are portable, regardless of employment status. Funds can be used on a pretax basis to pay for long-term care insurance premiums, health insurance premiums paid while unemployed, and COBRA premiums (for continuation of health insurance coverage available to formerly covered individuals under provisions of the Consolidated Omnibus Budget Reconciliation Act).

Funds can accumulate earnings, which are not taxed unless funds are withdrawn for nonmedical expenses. If withdrawn for nonmedical purposes, savings are considered taxable income and are subject to income and subject to a 10% penalty.  If the employee becomes disabled or reaches Medicare eligibility age, however, distributions for nonmedical expenses from the account are subject only to ordinary income tax, not the penalty tax. 

Seniors who have accumulated money in their HSAs that has not been used for medical expenses, and can this money use if for unrelated services.  They will be assessed the taxes but not the penalty fee.

HSAs will become the insurance of choice for most employers.  They offer advantages to both parties by making health insurance affordable for each.  Because of the tax advantages, the employee generally saves money both on the premiums and on the reduction in tax contributions.  The employer gains relief through lower premiums for the high deductible insurance while still caring for his employees.
This plan also works for those who have already made maximum contributions to other tax deferred investment vehicles by providing another “safe haven” for the money.  Because this plan is portable and belongs to the employee, they can take this account where ever they go. 

As a sign of the times, Blue Cross Blue Shield of Florida will only offer HSA’s to its employees.  Also GM has announced that it will begin to offer only HSAs but it is likely that the GM plan will become a hybrid rather than a traditional HSA.

If insurance companies believe that a Health Savings Account is the most cost effective choice for their employees, then the rest of us should be taking a serious look at them.

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