AmeriTex Brokerage Group, LLC

How Health Savings Accounts Work

Health Savings Accounts (HSAs) are simple and easy to understand.

A Health Savings Account is a tax-favored savings account combined with a qualifying high-deductible health insurance policy. By allowing you to deposit tax-deductible funds into an account that you can use to cover medical costs, HSAs enable you to take control of your own health care decisions.

First you must have a high-deductible health insurance policy that qualifies to be partnered with an HSA.  These plans are available through various insurance companies, depending in what part of the country you live.  The plans are all similar in the fact that they have deductibles between $1000 and $5100 for singles, and between $2000 and $10200 for families.

Once your insurance policy has become effective, you may fund your HSA account.

Tax Deductible Contributions

HSAs allow you to legally avoid federal income tax by saving 100% of the health plan's deductible, up to $2650 for singles or $5250* for families, into your HSA account.  Whatever you deposit into your account up to April 15, is an "above the line" tax deduction for the previous year's income taxes, meaning you get a federal income tax deduction for money you put in even if you don’t itemize deductions.  If your employer makes an HSA contribution for you, it is “excluded” from income, and not subject to any income tax or FICA.  Either way, this will immediately reduce your federal income tax due for the year.

      *maximum for a family in 2005.  Individuals over age 50 may deposit into their account and take a tax deduction of an additional $600.

Tax-subsidized Medical Expenses

Even though you have received a tax deduction by putting your money into this account, the money is still yours to spend
tax free, as long as you spend it on qualified medical expenses.  Since you have a high-deductible plan, this would of course include any expenses you incur from going to the doctor, purchasing prescription drugs, or paying other expenses toward your deductible.  Once your deductible is met, the health insurance covers your medical expenses as defined in the policy.

In addition to being able to withdraw your money tax free to cover these types of expenses (which might otherwise be covered by a traditional low-deductible high-premium policy), you can use your HSA account to cover other costs that would not normally be covered by a health insurance policy.

These include:

• Dental expenses.  Individuals can typically only purchase dental discount plans, or fairly expensive dental policies with a limited choice of dentists.  Coverage for braces is normally very limited. Any of these medically necessary procedures can be paid for from your HSA account.
  
  
• Mental therapy.  This includes the charges of psychiatrists, psychologists, psychoanalysts, and psychotherapists.
  
  
• Physical therapy.  This could include hydrotherapy, chiropractor services, or medical massage therapy.
  
  
• Alternative treatments.  This could include acupuncture, Ayurvedic Medicine, aromatherapy, homeopathy, Traditional Chinese Medicine (TCM), nutritional consulting, or even healing services provided by a Christian Science Practitioner or other type healer.
  
  
• Transportation and lodging expenses, when related to health care
  
  
• Charges incurred as part of a preventative health program.  This could include vaccines, blood tests, metabolism tests, and other lab tests, and even fees paid to a health institute or vitamins if prescribed by a doctor.
  
  
• Nonprescription medications, such as aspirin or cough syrup
  
  
• Special fees incurred by handicapped individuals, including wheelchairs, telephone or TV equipment to assist the
  hard-of-hearing, the cost and care of guide dogs, or special school costs for the handicapped
  
  
• Maternity expenses that are not covered by your health insurance policy
  
  
• Insurance premiums to pay for qualified long-term care

Also note that the HSA account can be used to pay these expenses for any spouse or dependent member of the family, even if they are not covered under the insurance policy.

More complete information can be seen at on our Qualified Expenses page.

Premium and Tax Savings

Health Savings Accounts can help you save money on both your insurance premiums, and your income taxes. Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical plan that has a $500 deductible.  And there is no other investment that offers a tax deduction today along with a tax-deductible withdrawal tomorrow.  The savings from the lower premiums along with the tax deductions could be $5000 or more every year.

                                      Let's see what you could save

This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $1,500, and $550 in expenses for dental care, contacts and eyeglasses.  Health insurance premiums vary substantially based on age, geographic location and other variables.  Federal tax savings calculations assume that contributions are deducted from federal taxes.  Withdrawals for nonqualified expenses prior to the age of Medicare eligibility are subject to a 10% penalty by the IRS.

Note: In addition to the tax and premiums savings shown above, self-employed individuals are also eligible to deduct 100% of their health insurance premiums from their federal income tax.

Long-term savings

A particularly appealing aspect of HSAs is that they encourage individuals to stay healthy.  Any money from your HSA account that is not used to pay medical expenses is yours to keep.  The money grows in the account free from federal taxes and remains free from federal tax when you take it out if it is used for qualified medical expenses.  There is a 10% penalty if the funds are withdrawn before age 65 for a non-medical expense, but after age 65 they can be withdrawn penalty-free for any reason (you do pay income tax on the money withdrawn).

Because all your deposits that are not used to pay medical expenses grow tax-deferred, the investment opportunity is tremendous.  Potential return depends upon the interest rate at which your investment grows, and on how much of your deposit is used to pay medical bills.  Investments can be placed in savings accounts paying 1 - 4%, or in stocks, bonds, or mutual funds with higher potential returns.

For most Americans, out-of-pocket medical expenses are a relatively small expense each year.  This chart shows annual medical expenses for the United States population by percentage:

If you regularly fund your HSA, and are fortunate enough to be healthy and not use a lot of medical care, a substantial amount of wealth can build up in your account.

Long Term Savings Chart 

Overall impact of HSAs

We truly believe that Health Savings Accounts are one of the best things to come out of Washington in a long time.  They encourage several things that are positive for America's future:

• HSAs let consumers choose how to spend their own health-care dollars.  Ever since most first-dollar expenses have been paid for by a third party (insurance companies), medical expenses have soared.  We believe that individual consumers are better able to decide how and where to spend their health-care dollars than are insurance companies.  People who buy medical services using their personal HSA funds will shop around for the best value for their dollars, and health care providers will feel pressure to charge competitive rates to attract patients.  In other words, doctors will shift their focus from serving the insurance companies back to serving their patients.
  
  
• Our previous system has led to a population that has the highest rates of diabetes, heart disease, and other degenerative diseases in the world.  By making many preventative expenses eligible for coverage through HSA accounts, and by letting people keep any money they don't use, HSAs provide a powerful incentive for people to take a more proactive approach to their own healthcare.
  
  
• Only by giving individuals the freedom to make their own choices can we as a society learn of the best solutions.  By allowing the use of HSA funds to pay for alternative, holistic, and preventative treatments, innovation and investment will be encouraged in areas where the current system has failed to find solutions.  The end result should be a healthier populace with access to a wide choice of treatment options.