Towards the latter part of 2003, the Federal Legislature approved the plan for health saving accounts commonly referred to as HSAs. These accounts are unique because they are a blend on high deductible plans and savings account. Employers who cannot afford group health insurance plans for their employees can opt for this because they come at lower premiums as compared to low deductible plans.
Annual contributions which can be made by employers and employees to the HSAs can go up to 100% of the deductible amounts specified per year and this money can be used for any qualified medical services. The employee who is covered controls this account and can use the money in the account to pay for his regular expenses.
Any extra expenses related to health services, as per the terms and conditions mentioned in the policy, will be covered once the deductible amount has been accumulated in the savings account. In such a case, when the employee avails care from a provider mentioned in the PPO network, he needs to pay only 10% of the costs.
Contributions of the employee and the employer are tax free and the unused amount at the end of the year gets rolled over to the next. In addition to qualified medical expenses, the employee may withdraw the funds in this account for any other reason; however, in this case a 10% penalty is levied by the IRS and will also get included in the gross amount for taxation.
All individuals who are eligible for HSAs can get their federal income tax reduced by contributing towards this health plan, starting 2007. It will be considered similar to the IRA contributions which are tax exempt. What makes things even better is the fact that, irrespective of the income, any individual can opt for HSAs due to the absence of phase out rules.
The new tax law that came into effect as of January 1, 2007 brought about notable changes to the HSAs. The number of people who can opt for it has now increased considerably.
You can contribute money to the HSA account as often as possible and the amount thus contributed can be used to cover expenses incurred due to doctor visits and other qualified expenses which your health insurance will not cover until you completely amass the deductible amount in the savings account.
This policy is one of the best policies since it does not have any “use it or lose it” provision. The money you contribute is exempt from tax, you can use the money to pay the medical expenses and also the unused amount stays in the account and generates interest.
Despite not being a true checking or savings account due to legal and tax constraints, it still has features of both since you are provided with debit cards and checks.
Let us understand the contributions for individual and family plans better.
Individual plan
Let us assume a person who has high deductible coverage from a health insurance plan with $1,000 deductibles per year. The contribution made by the individual can be up to $1,000 for an amount of $2,850.
Family HSA plan
Let us consider a family that has coverage with $4000 deductibles per year. The contribution can be up to a maximum of $4000 per year for a maximum amount of $5,650.
The annual earning should be greater than or equal to the contributions made by the individual.
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