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Health Savings Account (HSA) |
Great news! The U.S. Congress recently
passed legislation which makes paying for medical expenses much more
affordable for consumers. As of January 1, 2004, the new law provides broad
access to Health Savings Accounts, which allows consumers to pay for
qualified medical expenses with pre-tax dollars (This means income-tax
free!) and save for retirement on a tax-deferred basis.
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What are Health Savings Accounts?
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Health Savings Accounts, or HSAs, combine
high-deductible health insurance with a tax-favored savings account. HSAs
are a new way for people to use pre-tax money in the short and long term as
they save for their health care expenses. This makes them like a traditional
IRA for healthcare, but much better:
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- Pre-tax money is deposited each year into an HSA and can be easily
withdrawn by check or debit card at any time with no penalty or taxes to
pay routine medical bills and other qualified expenses. Withdrawals can
also be made for non-medical purposes, but will be taxed as normal income
and are subject to a 10 percent penalty if done prior to age 65.
- Any HSA funds not used each year remain in the account, and earn
interest tax-free to supplement medical expenses at any time in the
future, even into retirement, making it a "healthcare IRA."
- Like an IRA the account belongs to you, not your employer. Unlike an
IRA, your employer can contribute to your HSA.
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Who is eligible and how does it work?
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HSA is available to anyone in the U.S.
under the age of 65 if they have a qualified health insurance plan:
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- For individuals, a qualified health insurance plan is one with a
minimum deductible of $1,000, and a $5,000 cap on out-of-pocket expenses
(in 2004.)
- For families, a qualified health insurance plan is one with a minimum
deductible of $2000, and a $10,000 total cap on out-of-pocket expenses (in
2004.)
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Once you have an HSA-qualified health
insurance plan, and have opened a Health Savings Account, you can make
yearly pre-tax contributions of up to 100 percent of your health plan's
deductible. (Contributions cannot exceed $2,600 for singles or $5,150 for
families in 2004.) If you are between the ages of 55 and 65, you can make an
additional annual "catch up" contribution (of up to $500 in 2004.)
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When you need to pay for a medical
expense, use money from your HSA to pay for it. HSA funds can be used to pay
for deductibles, co-payments, coinsurance, and other qualified medical
expenses not covered by your health insurance plan. But in general, an Health
Savings Account
cannot be used to pay for health insurance premiums if you are under age 65.
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What are qualified medical expenses?
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Use funds from your Health Savings Account
to pay for:
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- Deductibles
- Co-payments
- Coinsurance
- Prescription drugs
- Medically-related transportation and lodging
- Long-term care services and insurance premiums
- Health insurance premiums if you are receiving federal or state
unemployment benefits
- Premiums under COBRA-qualified plans
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Why should I get an Health saving acount?
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Save money in the short and long term:
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- By having lower taxable income when you invest in your Helth saving
account or HSA with pre-tax dollars.
- With tax-free interest on the money you save in your Health saving
account or HSA.
- By paying no penalties when you use your Health saving account or HSA
for qualified medical expenses.
- On a higher-deductible health insurance plan, which have lower
premiums.
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