Health Savings Accounts (HSA's) are a new option for health insurance and they have two parts. The first part is a health insurance policy that covers large hospital bills. The second part of the Health Savings Account is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.
Overview of HSA's:
Health Savings Accounts (HSA's) are a recently available way people can pay for un-reimbursed medical expenses (deductibles, co-payments, and services not covered by insurance) on a tax-advantaged basis. HSA's can be established and funded by eligible individuals when they have a qualifying high deductible health plan and no other health plan, with some exceptions.
- For 2015, the maximum annual HSA contribution for an eligible individual with self-only coverage is $3,350
- For family coverage, the maximum annual HSA contribution is $6,650.
- Catch up contribution for individual who are 55 or older is $1,000
- Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was an eligible individual in the year. For individuals who are no longer eligible individuals on that date, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual.
The tax advantages of HSA's can be significant for some people: contributions are deductible (or excluded from income that is taxable if made by employers), withdrawals are not taxed if used for medical expenses, and account earnings are tax exempt. Unused balances may accumulate without limit.
HSA's and the accompanying high deductible health plans are one form of what some call “consumer-driven health plans.” One objective of these plans is to encourage individuals and families to set money aside for their health care expenses. Another is to give them a financial incentive for spending health care dollars prudently. Still another goal is to give them the means to pay for health care services of their own choosing, without constraint by insurers or employers. Since HSA's are relatively new, the extent to which they will further these objectives is not yet known. Among other things, it remains to be seen how many people will eventually establish accounts, how much they will contribute to them, and how much they will carry over to subsequent years.
**information provided by the Congressional Research Service**