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Health Savings Accounts (HSA) - Overview

A Health Savings Account is a portable, tax-favored savings account combined with a qualifying high deductible health plan (HDHP) that allows you to fund health care expenses with pre-tax money. Your deposits to a Health Savings Account reduce your taxable income, and withdrawals are never taxed as long as funds are used to pay for qualified medical expenses.

HSAs are similar to IRAs, but even better:

IRS HSA Limits

The maximum funding limits and minimum deductible for HSAs are set by the IRS each year and are as follows:

Minimum HDHP Deductible20092010 2011
Individual$1,150$1,200$1,200
Family$2,300$2,400$2,400
Maximum HSA Contribution2009 2010 2011
Individual$3,000$3,050$3,050
Family$5,950$6,150$6,150

How Health Savings Accounts Work

HSAs allow you to avoid federal income tax by saving up to $3,050 for singles or $6,150 for families, into your HSA account. There is no minimum deposit, but whatever you deposit into your account by April 15th is an "above the line" tax deduction for the previous year's income taxes, and the money is still yours to spend tax free, as long as you spend it on qualified medical expenses.

PPO Plan vs HSA Plan

Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical PPO plan with a $500 or $1,000 deductible. The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year.

However, with an HSA, you may have a higher major medical deductible, and you won't enjoy office visit and prescription co-pay benefits typical of PPO and HMO plans. Still, for the large majority of consumers, HSAs produce a net financial gain.

Consider these HSA Advantages over PPO Plans:

Example of HSA Plan Savings

Below is an example comparing how much a typical PPO plan with a $500 deductible and 80% coinsurance might cost, compared to a typical HSA plan with a $2200 family deductible and 100% coinsurance. This example is based on the average health insurance premium of an individual with a family of four living in Indianapolis, with $1700 in medical expenses and $450 in expenses for dental care, contacts and eyeglasses. This illustrates the difference in plan costs if the plan holder is in a 28% federal tax bracket, pays the 3% Indiana state income tax, and deposits $5,800, the maximum 2008 contribution allowed, into his HSA.

Average PPO PlanAverage HSA Plan
Premium paid (annual)- $12,100- $7,100
Your share of medical expenses- $740
$500 deductible
$240 coinsurance
- $1,700
Non-covered expenses- $450- $450
dental and eye wear expenses
Pre-tax expenses= - $13,290= - $9,250
Federal tax savings+ $0+ $1,624
($5800 x .28)
State tax savings+ $0+ $174
($5800 x .03)
Net expenses$13,290$7,452
Total net savingsn/a$5,838