HSA stands for "Heath Savings Account". It is a program enacted by the US congress and was created as part of the Medicare drug legislation. It allows consumers to pay for current medical expenses by purchasing a High Deductible Health Plan and saving for future health expenses on a tax-free basis. The HSA itself is not something one purchases, but rather a savings account into which monies can be deposited and are treated in a tax-preferred fashion. Ideally, one would use their savings account to pay for everyday medical expenses, and when a major medical emergency occurs, the HDHP will kick in and pay for the amount that exceeds the available funds in the HSA.
High Deductible Health Plans (HDHP) are also called "catastrophic" health insurance plans. Typically the costs to purchase a policy are quite inexpensive, as the insurance is intended for the worst possible medical scenario. Routine visits to the doctor, maternity care, nor emergency room visits for minor issues will not be covered. Further, those will pre-existing conditions or chronic illness such as diabetes, cancer, or heart problems may not even be eligible to purchase HDHP coverage. On the other hand, operations, accidents requiring hospital stays and x-rays would be an example of eligibility. The basic premise is that by paying a high deductible, clients take care of their immediate, everyday health care needs, but should a catastrophe arise, the client will not lose their life savings and other assets such as their homes.
Deductibles for HDHPs are normally anywhere from five hundred dollars to thousands of dollars, even as high as fifteen thousand. But to be eligible for the tax-free Health Savings Account program, in 2008, the minimum deductible for an individual was eleven hundred dollars and for a family, it was twenty-two hundred dollars. At the same time, maximums were set. Fifty-six hundred for individuals and eleven thousand, two hundred for families.
Typically, consumers should save their money by avoiding the purchase of traditional health insurance and taking those funds to put into the HSA. By purchasing alternative, cheaper insurance such as the HDHP, they can save for future expenses, especially in their retirement years. HSAs may be established and administered by banks, credit unions, and some insurance companies. In addition, employer-sponsored plans may be available through approved institutes. HSAs roll over from year to year and stay in place regardless of whether the customer changes employer.
Unlike other benefits provided by an employer, in regards to tax preferences, the contributions made on your behalf are generally considered tax-free. Additionally, the interest earned and withdrawals for medical expenses are also tax-free. This is the only tax program where all sides of the equation have favorable tax benefits. Personal contributions are direct tax deductions, earnings are tax-free, and withdrawals are not taxed. Lastly, the customer keeps the account for as long as he/she needs it. Nothing is lost just because it is not used in the early years of creation. There may, however, be costs associated with the administration of the plan which will vary depending on institute.
In conclusion, the HSA is used for general doctor's visits, some medications, and regular preventative health care. But should an emergency arise, the client will have coverage through the combined efforts of the HSA and the HDHP to advert financial ruin.