Health savings accounts (HSA) are tax-sheltered savings accounts that are combined with special High Deductible Health Insurance Plans (HDHP). Health savings accounts are an affordable health insurance option for many people, from individuals and families to the self-employed. The popularity of these plans continue to rise because they give people access to affordable health care and the ability to offset the high cost of premiums in exchange for a tax-free savings account.
Health savings accounts in Texas are non-taxable; neither on the money deposited in the account nor the interest it earns. You may make tax-free withdrawals from this account to pay for medical expenses, like deductibles and other medical costs, although, non-medical withdrawals would be considered taxable. Given the advantages, a health savings account may be right for you!
A study organized by a popular online healthcare company found some interesting statistics about those who purchased HSA health insurance plans:
- 42% were at least 40 years old
- 45% have household incomes of $50,000 or less
- 25% earn $35,000 or less a year
- 41% were uninsured prior to selecting their HSA plan
Background
Section 1201 of the Medicare Prescription Drug Improvements and Modernization Act of 2003, added section 223 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts ( HSA ) for taxable years beginning after December 31, 2003. HSAs are established to receive tax-favored contributions by or on hehalf of eligible individuals. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse qualified medical expenses.
Benefits of an HSA
The Advantages of an HSA can be broken down into two areas - savings benefits and tax benefits:
Savings benefits of an individual HSA
- HSA funds may be used to pay for current, future, and post-retirement qualified medical expenses not covered by the HDHP
- Savings can cover your pre-deductible health care costs and other qualified medical expenses
- Money not spent rolls over to following years
- Potential exists to build significant, nest-egg balances after years of tax-advantaged contributions and interest growth
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Savings benefits of a group HSA
- HSA funds can be used to pay for qualified medical expenses not covered by the HDHP
- Savings can cover your pre-deductible health care costs and other qualified medical expenses
- Money not spent rolls over to the following year
- HSAs are portable and owned by the individual; contributions cannot be taken away
- Potential exists to build significant, nest-egg balances after years of tax-advantaged contributions and interest growth
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Tax benefits of an individual HSA (subject to IRS Rules)
- Individual HSA contributions are tax-deductible up to the IRS maximum
- Interest earned on HSA funds is tax-advantaged
- HSA withdrawals, if used for qualified medical expenses, are tax-advantaged
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Tax benefits of a group HSA (subject to IRS Rules)
- Employee HSA contributions are tax-deductible up to the IRS maximum
- Employer contributions are exempt from federal employment taxes
- Interest earned on HSA funds is tax-advantaged
- HSA withdrawals, if used for qualified medical expenses, are tax-advantaged
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Eligibility for HSA
To be eligible to establish an HSA:
- You must be covered under a high-deductible health plan (HDHP)
- You may not be covered by any other health plan
- You may not be entitled to Medicare benefits (generally, this means you are under age 65)
- You may not be claimed as a dependent on another person's tax return
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