Health Savings Accounts

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A Health Savings Account (HSA) is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

You own and control the money in your HSA. Decisions on how to spend the money are made by  you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.

What Is a “High Deductible Health Plan” (HDHP)?

You must have an HDHP if you want to open an HSA. Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn’t pay for the first several thousand dollars of health care expenses  (i.e., your “deductible”) but will generally cover you after that .  Of course, your HSA is available to help you pay for the expenses your plan does not cover.

How can I get a Health Savings Account?

Consumers can sign up for HSAs with banks, credit unions, insurance companies and other approved companies. Your employer may also set up a plan for employees as well.

How much does an HSA cost?

An HSA is not something you purchase; it’s a savings account into which you can deposit money on a pre-tax basis. The only product you purchase with an HSA is a High Deductible Health Plan, an inexpensive plan that will cover you should your medical expenses exceed the funds you have in your HSA.

You can use the money in the account to pay for any “qualified medical expense” permitted under federal tax law. This includes most medical care and services, dental, vision care, and also includes over-the-counter drugs such as aspirin. A partial list of what is allowed is provided in IRS Pub 502.

You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:

  • Any health plan coverage while receiving federal or state unemployment benefits.
  • COBRA continuation coverage after leaving employment with a company that offers health insurance coverage.
  • Qualified long-term care insurance.
  • Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for:
    • Part A (hospital and inpatient services)
    • Part B (physician and outpatient services)
    • Part C (Medicare HMO and PPO plans)
    • Part D (prescription drugs)

You can use the money in the account to pay medical expenses for yourself, your spouse, and your dependent children.You can pay for expenses of your spouse and dependent children even if they are not covered by your HDHP. Any amounts used for purposes other than to pay for “qualified medical expenses” are taxable as income and subject to an additional 10% tax penalty.

 

Examples include:

  • Medical expenses that are not considered “qualified medical expenses” under federal tax law (e.g., cosmetic surgery).
  • Other types of health insurance unless specifically described above.
  • Medicare supplement insurance premiums.
  • Expenses that are not medical or health-related.

 

After you turn age 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional 10% penalty.

Additional Resources

US Department of Treasury

Wikipedia: Health Savings Accounts

Tax breaks

When all else fails, write it off…

Medical deductions are a little tricky. Here are some good resources.

Tax Strategies for Parents of Children With Special Needs

Special Needs Alliance

Los Angeles Times Article, How to Write Off Medical Expenses, Feb. 17, 2008

ABC News video, Tax Relief for the Disabled, March 24, 2008

ABC News video, Autism Tax Breaks, March 26, 2008

 

Deductible medical expenses include payments to diagnose, cure, treat or prevent disease. They are deductible to the extent that they exceed 7.5% of adjusted gross income, or, if the taxpayer is subject to the alternative minimum tax, 10% of AGI, said Stephen Dale, a Walnut Creek attorney and member of the Special Needs Alliance, a nonprofit group made up of attorneys specializing in disability law. So, if you have $50,000 in adjusted gross income, your medical expenses can be deducted if they are more than $3,750 or $5,000, respectively.

 

Some of the things you can write off include therapists, doctors, curriculum, books, trainings and conferences that inform you about your child’s disability, travel to therapists and doctors, including mileage and hotel; supplements, therapy equipment, dietary food differences (if regular bread is $1/loaf and GFCF bread is $4/loaf, you can write off $3). Here is an example of a GFCF diet deduction worksheet.

 

Disability Savings Act of 2008 (Senate Bill 2741)

The Disability Savings Act is pending legislation, if enacted, will encourage parents of children with disabilities to save for disability-related expenses such as preschool, tutoring, respite, clothing, out-of-pocket medical, insurance premiums, and much more, with federal matching funds for some income levels, and will not count against you if filing for Medicaid or other such programs. You can watch this bill’s progress.