The Basics of Health Savings Accounts
One aspect of many health care plans that doesn’t get a lot of attention is health savings accounts, commonly known as HSAs. If your coverage has a high-deductible attached to it, an HSA may be just the thing to save your wallet from an unexpected (and unexpectedly expensive) medical bill.
An HSA is basically a savings account, but unlike ordinary savings accounts that you might open at a bank, the funds you place into an HSA are tax free. Like a savings account, you can contribute to them throughout the year. The only real catch is that you can’t use them to pay for that Florida vacation you’ve been dreaming about or a new car. Instead you must use them to pay for unreimbursed qualified medical expenses you incur. The list of what counts as a qualified expense is pretty broad, although as of 2011 you can no longer use them to pay for over-the-counter medications.
That’s not to say the funds are locked up. You can still access them if you choose to. If the funds are not used for qualified medical expenses, distributions are treated much like early distributions from an IRA for tax purposes, meaning you may have to pay a tax penalty when you withdraw the funds. And, like an IRA, you can keep your HSA account until you retire.
If an HSA sounds like it might be right for you, contact your employer and see if they offer the option. If you participate in an HDHP or high-deductible plan, you can also open an HSA on your own by going to your bank or financial institution.
Good luck and good health.