A Health Savings Account (HSA) is a great way to plan for high medical costs. If you have a high deductible health coverage plan and are considering opening an HSA to supplement the deductible cost, here is what you need to know.
How to Get Started
Before you open an account with a bank or insurance agency, check to see if your employer provides an HSA. This may be the case if their offered health coverage is high deductible. When you open your account make sure it pays interest. You may have to meet a minimum balance before interest begins. Interest earnings are a great way to make money off your HSA while you are healthy and don’t need the funds. You may also have the option to invest your account like a 401K or an IRA. This allows you to earn more toward health care expenses when you are older.
How to Contribute
You can contribute post-tax money into your account and take a tax deduction at the end of the year. If your HSA is through your employer they can contribute pre-tax income from your paycheck. You can pay into your account each month or once a year. Your minimum contribution is based upon your insurance agent or bank’s requirements. It is best, however, to make sure you have enough in your account to pay your yearly deductible. You cannot exceed the IRS mandated yearly contribution limit. The limit for 2010 is 3,050 for an individual or 6,150 for families.
How to Pay Medical Expenses
So how do you use your account to pay medical bills? Your account holder may provide you with a debit card or checks to pay medical bills. If not, you will need to pay with your own money and then withdraw money from your account to recoup your loss.
Money withdrawn must be used only for qualified medical expenses, which are determined by the IRS. The IRS does not allow you to use your account to pay a health care premium unless it is for long term care insurance, basic Medicare costs, insurance while unemployed, or continuing a COBRA insurance plan after retirement. Do not use your account for any other purpose, or you will have to pay taxes on the amount withdrawn. If you are under 65 and not disabled, you will also have to pay a ten percent penalty.