What is HSA? 2005-04-22

The President of the United States signed legislation that allows for every United States citizen under the age of 65 to participate in an HSA. The bill allows people with high-deductible health insurance policies -- at least $1,000 a year for individuals, $2,000 for couples or families -- to shelter income from taxes.  With the introduction of the first HSA plan in Janaury 2004, the market has steadily been growing.  Individuals are eager to set one up -- which isn't surprising.  These "medical IRAs" give individuals greater control over their healthcare decisions, offer significant tax advantages and make it easy and economical to save for future medical expenses. They're a great opportunity.   A Quick Overview: An HSA is a special tax-sheltered savings account for medical bills. In the market it is being called a medical IRA. Instead of buying high-priced insurance with low copays, your clients buy a low-cost, high deductible health plan (HDHP) for the big bills and save the difference (in a HSA) to cover the small bills.  Money deposited into the account is 100% tax deductible and can be easily accessed by check or debit card to pay medical bills tax-free -- even for expenses not not usually covered by insurance like eye glasses and braces. What your client doesn't use for medical bills is  theirs to keep -- it stays in their account and keeps growing on a tax-favored basis to cover future medical bills or supplement retirement, just like an IRA.  Combined, the high deductible health plan and HSA provides: 1) lower premiums, 2) tax advantages, 3) flexibility, and 4) more cash at retirement.   Three Simple Steps: 1.  Apply for a qualified high deductible health insurance plan.  You must choose a HDHP that meets the specific HSA design specified by Congress -- not every "high deductible" product qualifies. The premiums should be low because of the nature of the plan. Additionally, if your clients are self-employed, 100% of their health insurance premiums may be tax deductible. 2.  After the HDHP is issued, then establish an HSA saving account at a qualified financial institution.  There are a wide variety of investment options for clients to choose from, including mutual funds and stocks and bonds.  Few institutions are registered with the IRS to offer HSA and service fees vary widely as well. 3.  Start funding the savings account.  Your can contribute based on a schedule that fits their needs. No minimum contribution is required, however annual calendar maximums set by the IRS apply each year.