Health Savings Accounts (HSA) evolved from the Archer Medical Savings Account (MSA) plans introduced in 1996. Archer MSA plans were limited to only individuals that were self-employed and included other restrictions regarding contribution limits. HSA plans were created by the Medicare Prescription Drug Improvement and Modernization Act that President George W. Bush signed into law on December 8, 2003. Additional changes to HSA plans were made in 2007. These changes included eliminating the account contribution limits as function of the plan deductible and eliminating the contribution pro-ration for plans that went into effective after January 1st each year. An addition change allowed a transfer between an existing IRA and an HSA.
The major difference between HSA plans and traditional non-HSA plans is the HSA plan's ability to create a tax-deductible contribution when deposits are made to a tax-favored savings account. Non-HSA plans do not provide the consumer with the ability to open an account that offers tax deductibility benefits. HSA plans allow the consumer to establish a tax-favored account that reduces the policyholder's taxable income for each dollar deposited into the tax-favored account. The funds in the tax-favored account can be withdrawn without tax or penalty if the funds are used for medical expenses.
Another significant difference with HSA plans and non-HSA plans is that a family HSA plan has a single-family deductible that applies in total to all members of a covered family. Non-HSA plan deductibles can apply to either two members or three members of the family depending on the plan.
HSA plans also address prescription benefits differently than non-HSA plans. HSA policies apply covered expenses, both medical and prescriptions, to the plan deductible. The prescription co-pay will be dependent on meeting the plan deductible. Non-HSA plans will typically have a separate prescription deductible, which is much lower than the plan deductible; typically $200, $300, $500 or $1,000. Only prescription benefits will apply to the separate prescription deductible.
plans actually have two components - the first is the health
insurance plan and the second is the actual health savings account.
The health insurance plan is very similar to health insurance coverage 20 years ago. The insured will self-insure up to the plan deductible, typically $2,500 for an individual and $5,000 for a family. By self-insurance, we mean that all health insurance costs up to the deductible will be paid by the insured, although the services will be billed at the negotiated, discounted preferred provider rate. As indicated earlier, even prescription costs are applied to deductible.
Once deductible has been reached, the insurance company will pay a percentage of each dollar above deductible. The percentage paid by the insurance carrier can vary but it percentage is either 75%, 80%, 90% or event 100%. The amount paid by the insured is referred to as co-insurance and the amount has a maximum amount that is the responsibility of the insured. The maximum dollar amount can vary between $500 and $1,000 depending on the plan. Once the maximum amount has been paid by the insured, the insurance company will pay 100% of all expenses for the remainder of the calendar year.
The second component is the health savings account. The health savings account is a separate account created at a financial institution. The account is very similar to an Individual Retirement Account (IRA) because each dollar deposited into the HSA creates an equal one-dollar tax deduction. The big difference between an HSA and an IRA is the funds in the HSA can be withdrawn at any time, with no tax or penalty, if the funds are used for out-of-pocket health care costs. Also, if the account has a fund balance at the end of the year, the funds are not forfeited but rollover into the next year and continue to grow tax deferred.
If an individual has a taxable income of $50,000 contributions to an
HSA can reduce the amount of income subject to tax. A family HSA can
be funded up to $6,250 in tax year 2012, which means instead of
paying tax on $50,000, the family would pay tax on $43,750. The tax
savings is realized even if no withdraws are made from the HSA
account and the funds continue to grow tax deferred in the account.
As contributions are made to the HSA future medical expenses are being accounted for and funded. If the account stays active until the insured member turns 65, the funds can be withdrawn for any purpose and only the applicable income tax is levied.
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