A Health Savings Account, or HSA, is a personal savings account that is designed to help people save up money that will be used to pay for medical and health related expenses that they might have in the future. This is a supplemental option that is goes along with certain kinds of health insurance plans, but is not a form of health insurance.
These kinds of savings accounts are tax free, and you will be able to earn interest on the money that is in your Health Savings Account. If you are pregnant and anticipating a lot of medical bills in your near future, you can start putting money into an HSA now, and use it later. This is just one example of how the money can be used. An HSA gives you some control over how your medical expenses are paid for.
How does it work? First, you must already have a High Deductible Health Plan (HDHP). This is health insurance that has a lower premium than most other health plans. It has a high deductible that you must pay for before your insurance company will cover the costs of your medical bills. The money you put into your HSA is used to pay for qualified medical expenses that your HDHP did not pay for. For 2010, and 2011, a person is allowed to contribute up to $3,050 into an HSA. A family can contribute up to $6,150. You cannot contribute more than this amount. All contributions must be made in cash.
One of the benefits of having an HSA is that the contributions you make into this account, and the interest it earns, are tax free. The interest rate you earn with this kind of savings account are generally higher than normal savings accounts. Some employers will add contributions to their employee’s HSA as part of a benefits package. If you are over age 55, you can add an additional $1,000 above the contribution limits. An HSA is something that can be inherited.
There are some disadvantages to having an HSA . First of all, you actually have to have the money to contribute to this savings account. Your HDHP must have a high out of pocket maximum for you to qualify for an HSA. In 2010, the deductible limits are $1,200 for an individual, and $2,400 for a family. Since there really is no way to know exactly what your health will be like in the future, you cannot be completely certain that the HSA will cover all of your medical bills. There are penalties if you use the money in the health savings account for anything other than appropriate medical expenses.
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